Can Illinois Model Lessen Inequality, Reform Muni Pensions? (Forbes)

By Carrie Sheffield

Public pension liabilities are a growing headache for many states, and are especially bad in Illinois. Fortunately, the Land of Lincoln now offers a possible template for how to shift state workers away from defined benefit (DB) pensions into more sustainable defined contribution (DC) plans. If successfully implemented, it would give public sector workers more control over their retirement and shield taxpayers from unsustainable pension burdens.

Illinois is piloting a “mostly mandatory” Individual Retirement Account (IRA) savings program for private sector workers. Though not a DC in that it doesn’t require employer payments, it requires businesses with 25 or more employees without a retirement program to enroll their workers into an IRA that automatically deducts 3 percent from each paycheck. Workers may increase the contribution or opt out entirely.

The Illinois IRA program could encourage poorer families to save more and help with wealth accumulation. Stan Veuger, resident scholar at the American Enterprise Institute (AEI), explains:

“I think it’s a great initiative, actually, for a variety of reasons. Tax-preferred saving vehicles like this reduce capital taxation, increasing the returns to investment and growing the capital stock; they are a move away from income taxation toward consumption taxation (if there were no contribution limits we would basically have a pure consumption tax immediately); they are a (small) supplementary step toward fundamental Social Security reform; they demonstrate a way to avoid state- and federal-level pension crises; and they help the non-wealthy build up wealth.”

Read More 

Focus Area: