* We discussed Bruce Rauner’s pension idea yesterday….
He favors capping pensions that have already been earned and moving government employees to a defined benefit, 401(k)-type of retirement plan.
As I told you before, this idea is laid out in a bill sponsored by Rep. Tom Morrison…
Amends the Illinois Pension Code. With respect to the 5 State-funded retirement systems: Provides a new funding formula for State contributions, with a 100% funding goal and amortization calculated on a level dollar amount.
Provides that no additional service credit may be accrued and no automatic increase in a retirement annuity shall be received. Provides that the pensionable salary of an active participant may not exceed that individual’s pensionable salary as of the effective date.
Provides that State-funded retirement systems shall establish self-directed retirement plans for all active participants and all employees hired on or after the effective date. Provides that all active participants shall have the option of participating in a self-directed retirement plan. Provides that these changes are controlling over any other law. Effective immediately.
* Rep. Morrison explained in an e-mail that this would not require Social Security payments…
No, SS payments would not be required because the total percentage contribution by teachers and their school districts (8% from teachers and 7% from school districts) exceeds the threshold that the SSA requires.
* i asked Aviva Bowen of the IFT for a response to the proposal…
Representative Morrison’s proposal would put teachers and other workers into risky waters without a raft. If the market crashes and our retirement security ship springs a major leak, private sector employees can stay afloat because they have Social Security benefits. Teachers don’t get Social Security and would drown, though Wall Street insiders like Bruce Rauner could make a killing by charging higher fees than the systems currently pay, all at taxpayers’ expense.
We also can’t forget that in our current fiscal situation, there are two ways for districts to pay this added cost: raising property taxes or slashing already slim school budgets.
That last point was quite interesting.
* Back to Rep. Morrison…
[The bill] would cost school districts 7% of their personnel costs.
* So, is this another version of the much-hated Democratic-sponsored “cost shift”? Morrison says it could be absorbed by a majority of districts…
(P)er their respective contracts, a majority of school districts already pick up some or all of the employee contribution to TRS, so a 7% contribution to a 401K type plan is very doable.
I agree it’s doable for those districts, but it would cost other districts more. A lot more.
* So, I asked Rauner’s campaign to comment on the very real probability that his pension reform plan would lead to local property tax hikes and/or local school budget cuts. I haven’t yet heard back, but I’ll let you know if they ever respond.
*** UPDATE *** I asked Teachers Retirement System spokesman Dave Urbanek if the Morrison bill would activate Social Security payments. His reply…
The ultimate decision would be up to the Social Security Administration. The bill, as I read it, does not require teachers to be in Social Security, but state statutes would not be the last word in the discussion. It’s a federal decision.
It is our understanding that a major determining factor in that kind of decision is not the contributions made by the employee and the employer to a separate government-run retirement plan, but the ultimate benefit that the employee would receive in retirement from that government-sponsored plan. For working people who are not in Social Security, the SSA sets a “safe harbor” threshold that corresponds to the benefit that its members receive. We are told by our actuaries that if the benefit from a government-run plan for someone who is not in Social Security falls below the Social Security safe harbor threshold, then the SSA steps in and places those members into Social Security so they do meet the safe harbor.
That is the situation that we’re facing with Tier II members. This is something that has been publicized for more than a year. The TRS actuaries tell us that because the Tier II benefit grows at a slower pace than the Tier I benefit and the Social Security benefit, that in about a decade the Tier II benefit will fall below the safe harbor threshold and that the SSA will compel TRS members into Social Security. What we’re not sure of is how that happens, and whether the SSA would compel all TRS members into Social Security, or just the affected Tier II members. The actuaries never mentioned that the decision had anything to do with contributions paid by members. Tier II members right now pay the same 9.4 percent of payroll to TRS that Tier I members pay, but on an apples-apples comparison with payroll, the Tier II benefit is 6 percent of payroll, so the Tier II members are paying for their entire benefit. The Tier I benefit is 17.29 percent of payroll, so Tier I members are paying a little more than half of their benefit. The extra 3.4 percent contribution being paid by Tier II members right now automatically goes to subsidize Tier I benefits.
So, as a general rule of thumb, if the pension code is changed in any way to reduce benefits and because of those changes retiree benefits will someday fall below the safe harbor threshold, then when that happens the SSA will act to bring everyone into the safe harbor.
I hope this helps.