As the Illinois General Assembly prepares to reconvene in January, lawmakers are looking at potential changes to the Tier 2 pension system to ensure compliance with Social Security and enhance benefits for government employees hired since 2011.
The Tier 2 pension system was established in 2010 with the goal of reducing long-term liabilities. However, concerns have been raised regarding its alignment with Social Security requirements and its fairness to public employees. Since not all government workers are covered by Social Security, federal law mandates that the benefits provided must at least match those of Social Security. If a pension system fails to meet this “Safe Harbor” requirement, the employer is responsible for covering the difference, which officials indicate could be costly, though the exact financial implications remain uncertain.
Sen. Robert Martwick noted that the concerns surrounding Tier 2 are not new, as they were anticipated during the legislation’s initial discussions. Employees under Tier 2 have expressed that their benefits, which are less generous than those of Tier 1 employees hired before 2011, pose challenges for retirement and are negatively impacting recruitment and retention in public sector roles.
Lawmakers are expected to return to Springfield on January 4th for a lame duck session before new members are sworn in on January 8th. A union-backed proposal aims to address the shortcomings of Tier 2, particularly the “Safe Harbor” issue, by increasing the maximum salary used to calculate pension benefits. Currently, the maximum salary for Tier 2 employees is over $40,000 less than the Social Security salary base and has not kept pace with inflation. The proposed changes would align the average salary calculation for Tier 2 with that of Tier 1.
Martwick highlighted that Tier 2 calculates benefits based on 60% of an employee’s highest average salary over eight years, compared to 70%-80% under Tier 1.
The proposal also includes an annual non-compounded 3% cost-of-living adjustment for all pension systems to help keep pace with inflation. Currently, Tier 2 pension systems for teachers, university employees, and state workers receive non-compounded increases of either 3% or half the inflation rate, whichever is lower. In contrast, Tier 2 pensions for judges and General Assembly members benefit from compounded increases.
In light of the diminished quality of Tier 2 benefits, unions and government employers have reported growing difficulties in retaining and recruiting talent for government positions.
Another significant aspect of the proposed changes would align Tier 2 retirement ages with those of Tier 1. Currently, Tier 2 employees must reach a higher retirement age, such as 67 for teachers, compared to 62 for Tier 1, and 55 for most police officers and firefighters versus 50 under Tier 1.
These discussions represent a critical step in addressing the challenges faced by Illinois’ public workforce and ensuring fair retirement benefits for all employees.
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