Illinois lawmakers are finalizing the 2026 budget before the spring session ends on May 31. A key element of the negotiations involves the future of “Tier 2” pension benefits for state and local workers hired in 2011 and later. Senate Bill 1937 proposes significant changes to Tier 2 pensions, including lowering the retirement age, reducing early retirement penalties, increasing Cost-of-Living Adjustments (COLAs), and calculating benefits based on fewer years of salary.
These changes could add more than $64.5 billion in additional costs for the state, according to an actuarial analysis. House Bill 3657 proposes similar benefit increases for local government employees in Chicago, which local governments will have to fund without state assistance. Critics argue for preserving the current structure of Tier 2 pensions and conducting thorough actuarial analyses before making changes.
They recommend addressing specific problems rather than boosting benefits across the board and expanding defined contribution plans for more flexibility.
Pension reform impacts budget negotiations
Illinois already faces a staggering $144 billion in unfunded pension liabilities, straining state resources and crowding out critical investments.
Civic leaders urge the legislature to take a careful and fiscally responsible approach to addressing Tier 2 pension shortcomings. Gov. JB Pritzker’s budget proposal includes a $78 million set-aside to address potential Tier 2 compliance costs, acknowledging the risk while stopping short of overcommitting before more is known.
Civic leaders caution against turning the Tier 2 fix into an opportunity to add “sweeteners” that would deepen Illinois’ pension challenges. Implementing pension changes without knowing the true cost is a grave mistake that lawmakers must avoid. Comprehensive data on how many employees or retirees might be affected and when is needed for policymakers and the public to understand the scale of the problem and the timeline for addressing it.
As the deadline approaches, Illinois lawmakers face crucial decisions that will have long-lasting impacts on the state’s fiscal health and taxpayers.
