Illinois Pension Debt Soars to Nation’s Worst

State’s fiscal health threatened by staggering unfunded liabilities

Illinois faces the most severe public pension crisis in the United States, with unfunded liabilities now consuming a fifth of the state’s economic output. This alarming trend, detailed in a new report, jeopardizes retirees and taxpayers alike, demanding urgent reform.

Fiscal Instability Deepens

An annual nationwide analysis by the Equable Institute confirms Illinois’ precarious pension standing. The state’s unfunded obligations represent 19.02% of its gross domestic product, an increase from the previous year. This means nearly one-fifth of everything Illinois produces would be needed simply to cover the pension shortfall.

The financial strain is palpable. Taxpayer contributions to state pension systems have surged nearly twentyfold since 1996, reaching $11.2 billion in fiscal year 2025. This immense pension burden directly contributes to Illinoisans bearing the nation’s highest effective property tax rate.

Funding Ratio Trails Nation

Illinois’ pension funding ratio, a measure of assets set aside for promised benefits, stands at a dismal 50.6%. This places Illinois second-to-last nationally, just behind New Jersey’s 50.2%. It signifies that the state has only half the funds required to meet its current pension obligations.

This low ratio, where only four states remain below the 60% threshold considered stable by many analysts, highlights significant financial vulnerability. A report from S&P cites this ongoing pension debt as a primary driver of Illinois’ lowest-in-the-nation credit rating, increasing borrowing costs and deterring new residents.

Distressed Systems Persist

Individual state pension systems within Illinois are also under immense pressure. Three of the state’s five statewide systems are ranked among the ten worst-funded in the nation, mirroring New Jersey’s issues. The State Universities Retirement System, though improving, still faces significant challenges.

Pathways to Stability Proposed

Addressing the crisis requires a multi-faceted approach. Lawmakers are urged to maintain the cost-saving Tier 2 pension formula, resisting union pressure for benefit increases that mirror the unsustainable Tier 1 promises. Additionally, offering new state employees a defined-contribution option, similar to a 401(k), could provide portable benefits and reduce long-term taxpayer risk.

A critical step involves amending the Illinois Constitution, which currently severely restricts pension reform. Such an amendment would enable the state to implement proven reforms, like responsible cost-of-living adjustments, seen in other states, bolstering fiscal stability and ensuring the long-term viability of pension benefits for all.

The prolonged underfunding of Illinois pensions compared to other states serves as a stark warning. The longer the state delays meaningful action, the greater the threat to its financial health, placing both current pensioners and future taxpayers in a precarious position.