Tier 2 pensions a better deal for long-term state workers than Social Security

Career state workers receiving a Tier 2 pension stand to retire with significantly higher payouts than Social Security would deliver.

Critics argue Illinois’ Tier 2 pensions for workers hired since 2010 are at risk of violating federal rules mandating pensions be at least as generous as Social Security, but retirement compensation for full-career state workers easily exceeds Social Security benefits.

For employees with 30 years of service, Tier 2 guarantees a minimum of 66% of their final average salary for life, with the annual pension payment growing annually. Based on this year’s pensionable salary cap, this would amount to $84,007.

That is nearly two times the maximum Social Security benefit of $48,516 for an employee retiring at 67, and the maximum benefit would only apply to someone who had earned at or above the Social Security wage base for 35 years. In other words, very few people retiring on Social Security are in line to receive the maximum amount.

For workers who have dedicated their lives to public service and earn below those caps, the structure of Tier 2 still provides a much stronger retirement package than Social Security. Tier 2 refers to the state pension system for those hired since 2010.

The Tier 2 system also directly links retirement benefits to an employee’s average salary during the eight highest-earning years of the last 10 years of their career. Typically that makes those benefits more generous than Social Security, which factors in 35 years’ worth of a worker’s earnings to calculate benefits. A state employee is virtually guaranteed to earn higher benefits under Tier 2 than under Social Security.

Tier 2 was designed to avoid the financial excesses of Tier 1, where benefits often far exceeded lifetime contributions and ran well ahead of the investment returns from those contributions. Unlike Tier 1 pensioners, Tier 2 members fully fund their own retirements. This makes for a more sustainable system while still providing substantially higher payouts than Social Security.

Illinois already faces $144 billion in pension debt. The state cannot afford to repeat past mistakes by over-promising benefits it cannot afford.

The state has done neither legal nor actuarial analysis of the Tier 2 system. Changes should not be made if lawmakers don’t know whether there is a problem or what their proposals would cost.

Sweeping, costly reforms to Tier 2 would erode the cost-saving benefits of the system while imposing a greater burden on taxpayers. Instead, Illinois should focus on maintaining the stability of Tier 2 – a system that is working as intended and provides better retirement security than Social Security for lifelong public servants.