There have been calls for pension benefit reductions for active participants in the five state retirement systems. Members of the Illinois Education Association belong to the Teachers’ Retirement System (TRS), the State Universities Retirement System (SURS) and the Illinois Municipal Retirement Fund (IMRF). (Unlike TRS and SURS, IMRF is not a state-funded plan.)
There are multiple reasons why reductions in pension benefits are neither legal nor a viable solution to the state’s budget woes. But, first, it’s important to understand what public employee pensions are and are not. Pensions are deferred income, not a perquisite. Illinois public school teachers earn pensions as part of their overall income and help fund the pension system through substantial yearly contributions.
The Illinois Constitution states that membership in the pension systems “shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
Despite this clear directive, legislation that would have diminished pensions for active participants in the five state retirement systems was proposed in the spring 2011 legislative session.
Senate Bill 512 offered three options for participants in these state retirement plans:
- Continue participation in the retirement system; receive the same benefit but pay significantly more for that benefit.
- Opt for lesser retirement benefits (example: a kindergarten teacher would teach until age 67).
- Choose a new defined contribution (401k-type) retirement program.
All three options diminish/impair the “contractual relationship” that became effective when active employees joined the retirement system. Therefore, SB 512 is clearly unconstitutional. Should lawmakers pass the legislation, an expensive court fight would ensue, which the state is sure to lose.
Beyond the constitutional issue, there are clear economic issues to consider, proving that the current system is the best deal for employees and taxpayers.
Teachers don’t receive Social Security; they pay into the pension instead.
Illinois is one of 14 states in which teachers do not participate in Social Security. In fact, two federal laws impact access to Social Security: the Windfall Elimination Provision (WEP) cuts any earned Social Security benefits gained through prior employment or a second job while teaching, and the Governmental Pension Offset (GPO) denies a teacher his/her spouse’s full benefit in the case of the spouse’s death.
The decision to exclude teachers from the Social Security system, decided decades ago, was based on sound financial thinking. A school district’s pension contribution (0.58 percent of salary instead of 6.2 percent for Social Security) meant that more money could be spent on students’ educational programs. Teachers picked up a larger share (now 9.4 percent of salary), and the state committed to making annual contributions.
Reducing benefits for Illinois educators amounts to cutting a hole in their financial safety net.
Underfunding by the state caused this problem. The retirement systems are underfunded by billions of dollars because political science has trumped actuarial science in Illinois. Since 1940, the state has never made its contribution based on a standard actuarial funding method. From 1953-2010, the difference between actuarially determined and actual contributions to TRS totaled more than $14 billion, money that was redirected to more immediate priorities by legislators and governors.
Rather than raise sufficient revenue or create a state budget that pays the pension obligation and provides state services at desired levels, lawmakers and governors used the pensions as the rest of us might use our personal Visa.
When a credit card bill isn’t paid, the balance accumulates with interest charges. Even if you tear up your credit card, the balance is still owed.
The teachers and districts have always made their required contributions. The state’s failure to do so has put us in this quandary.
Illinois teachers pay more and get less. An AON consultant stated that when compared to their counterparts in similar states, Illinois teachers pay 15 percent more for their retirement benefits, adding that Illinois teachers “receive a lesser benefit” than their colleagues in other states, “though they pay more for their benefit.”
Reducing benefits won’t fix the underfunding problem. Those making the argument that cutting benefits will fix the pension problem commonly confuse two key factors: normal cost (the actual cost of benefits earned in a year) and the unfunded liability. Let’s put this in real numbers:
• The state’s contribution to TRS for 2011 was $2.24 billion. Only $700 million was needed to cover normal cost, but an additional $1.4 billion had to be added to help pay off the unpaid pension debt incurred decades ago. Had Illinois paid its bill over the decades, a $700 million payment would have been required this year, an amount that would not have stressed the state budget.
Benefit changes would not create immediate revenue to pay the unfunded “credit card bill,” which has risen to around $85 billion for the five state systems combined. For example, asking teachers to pay an additional 1 percent on top of the already high 9.4 percent would only generate $200 million (for all systems).
In the spring of 2010, claiming it would cut costs, lawmakers passed the Tier II plan, imposing major benefit cuts on newly hired teachers. State contributions to the retirement systems were lowered immediately, though significant actuarial savings will not materialize until 2056.
A 401(k) plan would undermine the systems and raise state costs.
This spring, SB 512, based on data from a business group’s actuarial firm and using private pension plan rules rather than those required under public pension plans, was again presented as a cost-saver. This version proposed putting teachers into a 401(k) plan. Ironically, this change would worsen the state’s fiscal position.
Moving current members to a defined contribution plan would reduce teachers’ yearly contributions to the pension systems, thereby reducing revenue that would be generated by the sound investment policies of TRS.
TRS investments have regularly exceeded expectations; while the projected rate of return is 8.5 percent, the average annual return since 1982 is 9.8 percent. That investment revenue helps pay the pensions of 97,000 retired teachers and will help fund the future pensions of more than 170,000 teachers.
Moving to a defined contribution plan would raise the state’s liability, as costs for a defined contribution plan are three times higher than for a defined benefit plan. With members’ contributions directed toward a 401(k) rather than the pension fund’s investments, less money would accumulate for current and future retirees. The entire sustainability of a pension for future and even current retirees would be in jeopardy.
The employees did not cause the state’s pension problem, so holding them solely responsible for fixing the problem is not fair or reasonable.
So, what should be done?
Since benefits aren’t the problem, revenue must be part of any solution.
Illinois’ tax structure should ensure that equitable taxation is broad-based and stable. Too many individuals and corporations are able to legally avoid paying their fair share. Adopting the progressive income tax system would be a solid step toward a more fair tax system.
The demonization of public employee pensions has, for some, obscured the fact that these retirement plans are an investment that allows Illinois to continue to attract and retain quality educators to jobs that are crucial to the state’s future.
With regard to TRS and SURS participants, if we agree that a well-educated workforce is essential in order for Illinois to recover its financial health, does anyone think we can reach that goal if public education is unable to continue to attract top-quality people to the teaching profession?
The Illinois Education Association is committed to working for solutions to problems. We are willing to consider proposals that are constitutional, fair, and will allow Illinois to continue to attract high-quality people to public education.
Cinda Klickna is president of the Illinois Education Association.
Illinois Issues, October 2011
The other side: Illinois Policy Intsitute by Marc Levine