Illinois Offered Her $100,000 for Part of Her Pension COLA. The Raise She Gives Up Lasts the Rest of Her Life.

Picture a 62-year-old Illinois community-college instructor, a Tier I member of the State Universities Retirement System (SURS) who also qualifies for Social Security through earlier private-sector work. She opens a letter offering roughly $100,000 if she accepts smaller pension increases for the rest of her life. The offer feels like found money, but it is not a check she can deposit and spend. SURS requires the payment to be rolled directly into an eligible retirement plan, such as an IRA, 403(b), or 457 plan. What she gives up is decades of compounding, and once she signs, the choice is irrevocable.

Illinois has extended the public-pension buyout program through June 2028, although it could end earlier if the bond proceeds funding it run out. Social Security and Medicare matter here because the choice changes when retirement income reaches her tax return and how much control she retains over it.

The Raise She Is Actually Selling

The core swap is simple to state and easy to underprice. Without the buyout, she receives a 3% compounded annual increase. With it, that becomes a delayed 1.5% non-compounded increase. The delay matters. The smaller increase does not begin until the January following the first anniversary of retirement or the January after she turns 67, whichever comes later. For someone retiring at 62, several years can pass before the first increase arrives.

SURS publishes an illustration that dramatizes the long-term gap. A starting pension of $3,300 a month grows to about $5,960 after 20 years without the buyout. With the buyout, the same starting pension grows to approximately $4,440. That is a difference of roughly $1,520 every month after 20 years, and the reduced increase also applies to any eligible survivor benefit.

Another number belongs in the decision. SURS calculates the lump sum at 70% of the difference between the actuarial present value of the two benefit streams. The offer is substantial, but it does not represent the full estimated value of the pension increases being surrendered.

The Tax Bill Is About Timing

A direct rollover into a traditional IRA does not create taxable income that year. Taxes arrive when she withdraws the money. A rollover into a Roth IRA is different because the converted amount generally becomes taxable immediately. If the money enters a traditional IRA, future withdrawals and required minimum distributions will add to the income used to determine how much of her Social Security is taxable. Because she is 62 in 2026, her required minimum distributions (RMDs) generally begin at 75 under current law.

Those distributions can also increase the modified adjusted gross income (MAGI) Medicare uses to calculate Part B and Part D surcharges roughly two years later. In 2026, a single filer with MAGI above $109,000 pays an additional $81.20 per month for Part B, with larger surcharges at higher tiers. But the buyout does not create this tax issue from nothing. Rejecting it leaves her with a pension that grows much faster, and those larger pension payments also count as income for Social Security taxation and Medicare.

The real difference is control. The pension delivers increasing taxable income automatically for life. The rollover lets her manage withdrawals before RMDs begin, but it also introduces investment risk and the possibility that she spends or loses the money too quickly.

Where Social Security Fits

SURS-covered employment generally does not pay into Social Security. Her benefit would have to come from earlier covered work, a spouse’s record, or another qualifying source. For someone who receives both checks, the pension and IRA distributions can each make more of the Social Security benefit taxable.

That makes the buyout a lifetime-income decision first and a tax-planning decision second. Taxes matter, but they should not obscure the much larger question of how long she expects the pension and any survivor benefit to run.

Two factors deserve most of her attention:

1. Compare the lump sum with the after-tax value of the pension increases through her late 80s or 90s, including any survivor benefit.
2. Model both paths through age 75 and beyond. One produces larger automatic pension income. The other produces IRA withdrawals, RMDs, and investment results she must manage herself.

The point is to price what she is selling before admiring the six-figure offer.

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