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A Time to Act on the State Universities Retirement System
IF YOU ARE LOOKING FOR THE PAPER "SIX SIMPLE STEPS: REFORMING THE STATE UNIVERSITIES RETIREMENT SYSTEM" REFERENCED IN AN EMAIL FROM PRESIDENT EASTER ON TUESDAY, APRIL 9, 2013,
Pension experts propose new reforms for SURS
Four experts on public pensions have authored a reform proposal for the State Universities Retirement System (SURS) in Illinois. The authors propose giving participants a fair incentive to accept lower benefits by providing lump-sum payments in exchange, as well as changes in how SURS does business that could save more than $1.5 billion over time.
The white paper, published on December 10 by IGPA, also calls for changes to a bill currently before the Illinois General Assembly that could come up for a vote in January’s lame-duck session. Some provisions of that proposal, if allowed to stand in their current form, would result in higher tuition for students at the state’s public universities and community colleges, according to the pension experts.
“The uncertainty about the long-term security of the state’s pension system is putting the economic engine powered by its universities at risk of stalling,” said Avijit Ghosh, a professor of business at the University of Illinois at Urbana-Champaign.
The paper, written by Ghosh and fellow U of I professors Jeffrey Brown and Scott Weisbenner along with colleague Steven Cunningham of Northern Illinois University, builds on a set of proposals published earlier this year. The new paper was published as part of IGPA’s ongoing contribution to the dialogue on pension reform in Illinois (found at http://igpa.uillinois.edu/pensions).
The authors recommend a constitutionally feasible way for SURS participants to trade in a portion of their guaranteed benefits. The program would decrease future benefits but would offer to participants a lump-sum payment in exchange. The payment would be deposited into a self-managed retirement account.
"The opportunity to voluntarily trade-in part of one's defined benefit for a lump-sum is guaranteed to reduce projected liabilities for SURS," said Brown, the William G. Karnes professor of finance at the U of I and a member of the IGPA faculty. "This is because the lump-sum is being priced to reflect historical credited interest rates, which are higher than current market rates. The reason that many participants would voluntarily choose this lump sum, despite the lower present value, is that it provides them with an opportunity to diversify away some of the political risk that they face when they have such a large share of their future pension benefits linked to the fiscal health of the state of Illinois."
The authors also recommend ending the state’s tax exemption for retirement income and say that, while universities should be responsible for some portion of annual pension costs, shifting the entire burden from the state will lead to higher tuition. If universities take on some funding obligation, they also should be able to make decisions about how their pension plan operates.
The authors found several ways to increase transparency of the system while saving substantial costs in the long run. For example, changes to the effective rate of interest and other accounting measures could save the state almost $1.5 billion over time.
Finally, the authors remind that nothing is as important as the state paying off the current unfunded pension liabilities and guaranteeing that future payments will be made on time going forward.
Published December 10, 2012