ELIZABETH BAUERIllinois House District 53
Commentary

Real Solutions on Pensions

October 14, 2026 · Elizabeth Bauer

For the entirety of this campaign, I have put my experience as an actuary, and my credibility due to having researched and wrote about pensions, front-and-center, but I have not yet explained, for purposes of this campaign, the particulars of how I believe Illinois pensions can, and should be reformed. Here, in brief, in my plan. As a recap of the issue, there are three issues facing Illinois when it comes to pensions:

  1. First, Illinois’ pensions are the worst funded in the nation. This is bad in and of itself, and also drives a bad credit rating.
  2. Second, our spending on Illinois’ pensions sucks up money that would otherwise be spent on serious needs, or that drives taxes up, depending on your point of view. 20% of the General Funds operating budget goes to pension contributions – that’s 20% that can’t be spent somewhere else.
  3. Third, the Tier 2 pension reform passed in 2010, which affects those hired starting in 2011, was negotiated behind closed doors and without an actuarial study, and created a problem with compliance with federal Social Security law.

Here are the steps we should take:

Step 0: Do not, I repeat, do not add further pension sweeteners.

This seems obvious, but that hasn’t stopped the legislature, who boosted Chicago Police and Fire pensions in 2025. The justification for these sweeteners is something called the Social Security “safe harbor” – that is, a state or local pension plan that opts its members out of Social Security must pay benefits at least as good as Social Security, and Tier 2 pensions, reduced benefits for employees hired beginning in 2011, fail this test, or will fail it in the future, for at least some people. But the 2025 boost as well as future proposals – including SB 1937 co-sponsored by Rep. Grasse -- increase benefits well in excess of the federal minimum necessary. Under the rallying cry, “fix Tier 2,” the bills’ supporters would boost pensions significantly, unaffordably, and without an actuarial calculation to measure the cost, in the name of “fairness” and “employee recruitment.”

Step 1: Create a new “hybrid” pension system for new hires.

This means, to start with, everyone moves into Social Security. Most direct state employees already are, but teachers, university employees, Police and Fire are not. This means everyone gets a benefit – compared to right now, where a Tier 2 employee who leaves with less than 10 years of employment does not due to vesting rules. Second, adopt a risk-sharing system like Wisconsin’s. There are different versions but the basic idea is that the risk is pooled and shared so that, unlike a 401(k), no one has to worry about outliving their assets, about market fluctuations, or about making their own investments, but the state’s contribution is fixed and required up-front as much as possible. This resembles the “multi-employer” unions plans that made the news for bailouts, but the “good” multiemployer plans, the ones that are well-funded and stable, never made the news and those would also form part of the model. Plus, for systems outside the state employees themselves, individual employers like schools and the employees themselves would pay the contributions just like your employer and mine pay into Social Security and contribute to our 401(k)s.

Step 2: Offer Tier 2 employees the ability to change into this hybrid system for future benefits and adjust their past accruals to meet the “Safe Harbor” requirements.

(See Step 0 for why this matters.)

Step 3: Responsibly freeze benefit accruals for the highest-earning Tier 1 employees, those with the most generous benefits.

For retirees, this means freezing/pausing the COLA unless/until inflation has increased to a point that those benefits have moderated. For current employees, it means freezing/capping the pay used for the calculation of pension benefits, in line with the way private sector pensions have a pensionable pay cap set by law. Yes, based on the way the Illinois Supreme Court interpreted the pension clause and rejected a “fiscal emergency” type of exception, this requires a constitutional amendment. Yes, I think they made the wrong call by treating endless borrowing and burdening the next generation as an acceptable “solution” but that’s neither here nor there as I’m not an Illinois Supreme Court justice. Yes, this is a heavy lift. But as I wrote at the Chicago Tribune and at Forbes (reprinted at my personal website), this can pass if it’s done in a bipartisan fashion, as happened in Arizona.

Step 4: Consider funding options for the transition cost.

Right now, Illinois’s underfunded public pensions function as a pyramid scheme. New teachers pay into the system, but their contributions are a part of what’s built into the calculations that get the system to 90% funded in 2045. If they contribute to their own, fully-funded-by-design system, extra contributions will be temporarily required. Here’s where we have to work towards a bipartisan solution. Of course, the first step is a full actuarial analysis of the impacts of the change, and of multiple funding alternatives, under multiple scenarios. Here’s one option to secure bipartisan support for an amendment: Include within the text of the amendment that permits freezing of high pensions, a special-purpose millionaire’s tax/surtax that fills in the gaps identified by the actuaries and automatically sunsets when the funding target is reached, with no further constitutional authorization for a graduated tax outside of a pension-funding deal.

(Question for my progressive friends: Are you surprised about my suggesting a “millionaire’s tax”? Well, if the cause is truly good, and there’s no better cause than to get Illinois out of our pension mess, then I’m fine with it.)

All these steps work together to create a sustainable pension system to do the right thing for government employees and for the next generation.

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