A Time to Act on the Illinois State Universities Retirement System (SURS)

Posted by Jeffrey Brown on Dec 12, 2012

Filed Under (Retirement Policy)

Earlier this week, I released a report co-authored with Avijit Ghosh and Scott Weisbenner (both of the University of Illinois) and Steve Cunningham (Northern Illinois) that – yet again – tries to make the case for pension reform.  The news release can be found here and the full paper (including a one page summary) can be found here.

In a nutshell, the plan has three components:

1.  Change some of the SURS rules to reduce costs and increase transparency.  This includes pegging the SURS’ effective rate of interest to long-term bond rates.  For my prior musings on this topic, click here to see the blog I wrote on this back in June of 2010, entitled “A Hidden Pension Subsidy in SURS.”

2.  Providing participants with an opportunity to opt out of their automatic annual adjustment (sometimes called the COLA) in exchange for a lump-sum that is calculated to give participants a bit of a “haircut.”  We consider this to be a reasonably fair exchange, especially given its voluntary nature, in sharp contrast to the forced choice that has been proposed in other legislation (for example, see Nolan Miller’s post entitled “The Choice Between Two Unconstitutional Options is Not Constitutional.”)

3.  Expand the Illinois state income tax base to include retirement income.  There is really no compelling economic reason to exempt retirement income from the Illinois state income tax, and this may be the only way to get the retired generation to be able to contribute to solving our fiscal problems.

Whether or not our proposal has an influence on the debates in Springfield is anybody’s guess.  But one thing is clear: absent some time of substantial reform, Illinois is teetering close to a true fiscal cliff, one that will make the Washington DC fiscal cliff look like a small step down.


2 Responses to “A Time to Act on the Illinois State Universities Retirement System (SURS)”

  • Keith says:

    Don’t know enough to decide on 1. #2 is better than the so called choice between losing your health insurance or keeping your COLA. wasn’t #3 implemented to keep retirees in the state? Is that worth doing? Finally, Do residents pay state tax on social security? if not, then ending this for retirees many of whom don’t get social security would be unfair. However, could cap how much state pension income you don’t pay on and set that at maximum payout for social security.

  • Jeffrey Brown says:

    Thanks Keith. Yes, legislators have expressed concerns to me about people leaving the state. I am less concerned about people actually moving than I am about high-income / high-wealth part-time residents just shifting a few days on the margin so they can claim Florida residency instead. It is hard to estimate this, but the key point is that it would require an implausibly large “mobility elasticity” for this not to raise revenue. These behavioral responses would reduce the revenue relative to a world without such a response, but it would still raise revenue relative to a world in which we keep the income tax free.