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A little perspective on the pension mess

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Illinois

* We’ve read a lot lately, particularly from the Chicago Tribune editorial board, about how Illinois hasn’t met its pension obligations. But we’re not alone…

New Jersey’s governor, a fiscal conservative, has proposed not making the state’s entire $3 billion contribution to its pension funds because of the state’s $11 billion budget deficit. Virginia has proposed paying only $1.5 billion of the $2.2 billion required pension contribution. Connecticut Republican Gov. M. Jodi Rell is deferring $100 million in payments this year to the pension fund for state employees to help close a $518 million budget gap […]

“Of 71 pension plans that submitted 2009 contribution figures so far, the Center for Retirement Research found that more than 50%, or 39, reported not paying their full pension bill.

And another study shows it could be years before the problems get any better…

“The numbers are not going to look good for the next five years,” said Alicia Munnell, the director of retirement research at Boston College, who compiled the study. “But a continuing deterioration in the funding numbers should not be headline news going forward.”

Nor is there any apparent magic bullet to solve the pension funding problems.

“States and localities have little in the way of public options to fix the problems quickly,” Munnell said. “Really what we need to do is wait — wait for the economy and the stock market to recover.”

Illinois has the most underfunded state pension systems in the country, but it’s important to remember that we’re not totally alone here. This is a national trend.

And most governments that are changing benefits have done what Illinois has just done: Reduced bennies for future employees. From the Center for State and Local Government Excellence…

Among the 21 percent whose governments have changed their retirement plans, 73 percent say the changes have not affected current workers and 60 percent say the changes have not affected new hires.

* Recently, Steve Preckwinkle at the Illinois Federation of Teachers pointed out a major flaw in pension opponents’ outrage…

The [existing] Illinois teachers pension plan is mainly employee-funded in the first place. The state pays just 4.6 percent of a new teacher’s salary today toward a pension; the teacher pays 9.4 percent. The state’s cost is about 25 percent less than the 6.2 percent private employers pay for Social Security alone, already making it one of the lowest cost plans for taxpayers in the country. And Illinois teachers are not part of the Social Security system and therefore receive no Social Security benefit when they retire. Their pension is all they have to live on. […]

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Teachers gave up the option to be part of Social Security years ago because they believed in the fairness of the existing pension plan, which was jointly funded by teachers and the state. Illinois taxpayers save more than $700 million per year by not paying Social Security payroll taxes for 78 percent of all active employees in the five state-managed plans, including all public school teachers. Unfortunately, the state routinely skipped its payments, causing today’s mountain of pension debt. Teachers never missed a contribution.

Preckwinkle wrote that the union is now looking at putting newly hired teachers under the Social Security umbrella…

So now we will look again at the Social Security option for new teachers. Under state and federal law, they still have the right to be covered. And yes, it will cost hundreds of millions of new taxpayer-funded dollars should they choose coverage. Sorry, General Assembly, but even you can’t skip out on Social Security taxes once your employees are part of the system.

That’s a pretty big hammer, should they decide to use it. At least one freshman Democrat hopes to undo part of the changes…

d Democratic Rep. Farnham believes the pension changes were rushed and hopes to follow up with legislation allowing teachers to retire earlier than age 67 with full pension benefits.

At an Elgin Area School District U-46 “Principal for a Day” event April 1, Farnham said he felt negotiations between legislators and local unions had made significant progress over recent months.

“I hope the conversation isn’t over,” he said. Farnham said he’d spoken to Illinois Education Association leaders about efforts to cancel parts of the proposal.

Don’t hold your breath…

“If anything, there are discussions about bringing similar reforms to other budgets,” Brown said, referring to police and fire pensions which were not affected by last month’s changes. “I think the idea would be to embrace all of the (pension) funds.”

* Semi-related…

* Is it unions that prevent bad teachers from getting fired?: In Georgia, where 92.5% of the teachers are non-union, only 0.5% of tenured/post-probationary teachers get fired. In South Carolina, where 100% of the teachers are non-union, it’s 0.32%. And in North Carolina, where 97.7% are non-union, a miniscule .03% of tenured/post-probationary teachers get fired—the exact same percentage as California.

posted by Rich Miller
Monday, Apr 12, 10 @ 11:10 am

Comments

== The [existing] Illinois teachers pension plan is mainly employee-funded in the first place. The state pays just 4.6 percent of a new teacher’s salary today toward a pension; the teacher pays 9.4 percent. The state’s cost is about 25 percent less than the 6.2 percent private employers pay for Social Security alone, already making it one of the lowest cost plans for taxpayers in the country. And Illinois teachers are not part of the Social Security system and therefore receive no Social Security benefit when they retire. Their pension is all they have to live on. […] ==

But it is a defined benefit that can’t be taken away period due to the state constitution…

If you are lucky you get a 3% 401K match and there is nothing guaranteed there. No guaranteed growth, no guaranteed payout.

If you are trying to get sympathy from the overwhelming majority of people in this state who do not work for government who do not have a defined pension benefit try again.

Even those folks who have defined pension benefits who don’t have a constitution assurance they will be paid at pre-defined levels have to be rolling their eyes.

Comment by OneMan Monday, Apr 12, 10 @ 11:21 am
OneMan - I think Steve’s point is that the state contributes less to teacher pensions than it would to social security.

So you have to make a comparison to a private employee who gets a 3% 401K match AND gets social security.

I don’t know if the numbers are right (I assume they are), but it is a shot across the bow from IFT.

Comment by George Monday, Apr 12, 10 @ 11:32 am
Plus, you are talking an employee who puts 3% into a 401K, versus a teacher who is supposedly putting in nearly 10% for their own pension (and obligated to).

Comment by George Monday, Apr 12, 10 @ 11:33 am
Everybody who works in the USA except for some teachers and gov’t employees have a defined benefit plan. It is called social security. If the state had made contributions equal to what their SS costs would have been they would be in fine shape now.
Being against defined benefit plans is analogous to medicare recipients being against gov’t funded health insurance.
The goal should be to increase those employees benefit not penalize and envy those covered under a better plan.

Comment by B ill Monday, Apr 12, 10 @ 11:36 am
Why is it important to know we aren’t alone here??

How does the fact that many other state governments also feature irresponsible, profligate spenders who allow pensions to go unfunded in any way mitigate the disaster that Illinois pols have created?????

This remains a huge fiscal problem, even with the changes made for future employees (who won’t retire for a few decades). Other states’ problems don’t reduce our unfunded obligations by one penny.

Comment by Adam Smith Monday, Apr 12, 10 @ 11:39 am
===Why is it important to know we aren’t alone here??===

Because it’s so often portrayed as an Illinois thing. It’s a national thing.

Comment by Rich Miller Monday, Apr 12, 10 @ 11:43 am
The impact of early retirement on the cited savings compared to social security would need to be factored in. During this time, I assume that neither the government nor the retired teacher is putting money into the pension fund. This could impact the bottom line substantially if teachers retire and begin drawing pensions at 55.

Also, it should be pointed out that the root source of the teacher’s contribution to their pensions is what they are paid by the government (taxpayer). It is their money, but the source needs to be considered.

Comment by vole Monday, Apr 12, 10 @ 11:48 am
I suppose that one reason we didn’t hear too much from the unions while “pension reform” was being passed was that unions plan to start getting parts of the “reform” changed back. And hopefully the electorate won’t notice when they do.

With increasing numbers of non-government employees facing retirement without a defined benefit pension or, with a frozen defined beneft pension with fewer benefits than they signed up for, state and local government pension awards will continue to be an issue. Especially since the former greatly outnumber the latter in the workforce. And if public outrage gets to some level, politicians will have to take notice. To a modest extent, they already are.

The solution here is to develop a pension system that all American workers, including private sector and self-employed workers can pay into, backed by the government. Right now, most workers are locked out of such plans unless they land a govt job, and they must depend on defined contribution plans, if those. The latter are pretty risky, as we have just seen in the recession. And in a guaranteed-pension-less world, the former enjoy less and less popular support.

Comment by cassandra Monday, Apr 12, 10 @ 11:54 am
== The goal should be to increase those employees benefit not penalize and envy those covered under a better plan. ==

And tax guys like me to death to make it happen….

Comment by OneMan Monday, Apr 12, 10 @ 12:08 pm
Also Bill odds are I am never going to get back what I have paid into SS, doubt if that would be true if I were a teacher.

Also the work I did before graduating for college would have had me rather close to 40 credits for SS anyway.

Comment by OneMan Monday, Apr 12, 10 @ 12:13 pm
While the pension troubles are currently being shared by a lot of the States, how many of them were not making the pension payments when times were better? How many of them can say they have not made full pension payments in over two decades? I think Illinois is pretty much alone in that regard. That is where the biggest problem lies. I think we might find that State Employees might be more receptive to the current situation in regards to the pension if the lawmakers hadn’t raided the pension when times were better.

Comment by irish Monday, Apr 12, 10 @ 12:32 pm
Illinois is primarily alone in the steps it took to exacerbate this problem. Not reinvesting the funds following the pension loan and then skipping payments to avoid making budget cuts all the while expanding benefits.

Comment by Easy Monday, Apr 12, 10 @ 12:47 pm
I love the whining about not getting Social Security from teachers. In the private sector people pay FICA taxes and save with a 401K. Plus,many of these teachers do collect Social Security because they’d worked 40 quarters in the private sector. Many of us self-employed people pay double FICA taxes , who weeps for us?

Comment by Steve Monday, Apr 12, 10 @ 1:29 pm
One Man, the point is not sympathy, we get that pension envy is rampant. The point is cost, the thing that taxpayers are normally most concerned about. The state is actually getting a good deal when it comes to the day-to-day cost of the pension systems. If the state keeps cutting benefits, teachers and public employees can opt back in to Social Security and it would cost the state hundreds of millions more per year than it does today under the current system.
There’s also an equity argument. Every private sector employer pays a higher cost for your retirement than what the state pays for a teacher or public employee. Yet, we keep hearing the spin that current system is unsustainable. It’s just not true.

Cassandra, ask any legislative secretary if the phones were ringing off the hook the day before the pension bill passed. Also, that bill passed in record time to prevent opposition. The unions are not holding out hope for a trailer bill to change the legislation. The Speaker has been quite clear about where he stands.

Comment by Dave Comerford Monday, Apr 12, 10 @ 1:38 pm
Oneman,
Not true. Youy’ll get back what you paid within the firasts ten years unless you are really rich in which case you shouldn’t be complaining. State employees who get a pension and have earned at least 40 outside credits get a drastically reduced SS benefit, rarely more than the minimum regardless of how much they paid in.

Comment by Bill Monday, Apr 12, 10 @ 1:39 pm
I have yet to hear the Chicago Tribune, Republicans, or anyone else explain how reducing benefits for future teachers is going to help us fix our schools.

Nearly 1 in 20 classes in high poverty school districts throughout the state are being taught by teachers outside of their subject area.

Nearly 30,000 students each year are being taught by teachers who don’t meet federal standards.

The areas of greatest teacher shortage: math, science, computer science, and special education, followed by English.

And because I KNOW my Republican friends like to bash Chicago Public Schools, a few facts:

YES, the average CPS teacher does earn $67K a year…compared to $61K for the rest of the state.

The average CPS teacher also has more years of teaching experience, is more likely to hold a Master’s degree, and has to deal with Chicago’s cost-of-living.

The only significant difference between CPS teachers and other school districts is that CPS teachers are much more likely to be black. And even though 49.9 of the district’s teachers are white, I suspect that the reason Chicago teachers are such a favorite target is the misconception that most of the district’s teachers are black.

To the bigger picture:

Statewide, the average teacher earns and average of $61,402 a year in salary.

44% have bachelor’s degrees and 56% have master’s degrees, and they have an average of 12.5 years of experience.

If you think an annual salary of $61 K with a college degree, most likely a master’s degree, and nearly 13 years of professional experience is overly generous, keep in mind who we’re competing against:

English teachers - P.R. firms and law schools
Math teachers - engineering, accounting, financial firms
Science teachers - hospitals, medical schools, nursing schools, pharmaceutical, agribusiness, engineering firms
Computer science teachers - IBM, Google, Microsoft
Special education teachers - psychologists, sociologists, psychiatrists, pediatricians

I leave you with this: ANYONE who argues that teachers have got it easy or are over-compensated should quit their current job and contact their local school district about available positions.

Comment by Yellow Dog Democrat Monday, Apr 12, 10 @ 1:46 pm
I think the tone of the column was excellent. Illinois is on a pretty good corruption rip with Ryan and Blago back to back, but economically and fiscally, we’re not that different than most in the Midwest, the mythical Mitch Daniels’ Indiana included.

Anyone missed a pension payment yet? How many years until that’s even a possibility?

We’ve got problems, obviously, but some on here get hysterical over every bump in the road.

There’s no cure for life, daddio. These are tough times, but there have been a lot tougher. Get over it.

Comment by wordslinger63@gmail.com Monday, Apr 12, 10 @ 2:17 pm
Does anyone know if the local school districts make contributions to the pension plans?

Comment by Truth Seeker Monday, Apr 12, 10 @ 2:27 pm
==Does anyone know if the local school districts make contributions to the pension plans?==

Yes, they do. It is mandatory. Neither the school districts nor their employees are allowed to skip. And the School Board does not have to pass a referendum to raise the tax rate for that fund, so the tax payers cannot skip a payment either!

Comment by Pot calling kettle Monday, Apr 12, 10 @ 2:37 pm
Bottom line is that everyone but the State has been paying their fair share all along. The State dug the hole so deep that it cannot get out without changing the pension system.

Comment by Pot calling kettle Monday, Apr 12, 10 @ 2:38 pm
STEVE
Retired public employees who qualify for Social Security due to previous employment face a reduction (offset) in their SS benefits. So they don’t get the bonanza you suggested.

Comment by Reformer Monday, Apr 12, 10 @ 3:18 pm
==Illinois taxpayers save more than $700 million per year by not paying Social Security payroll taxes for 78 percent of all active employees in the five state-managed plans, including all public school teachers.==

That’s some funny math, as it only accounts for the front end of the transaction. If the state paid the higher payroll taxes, then the federal government, not the state, would be accountable for the benefits.

It’s likely that Illinois taxpayers would be far better off in the long run if the teachers were on Social Security, and that the teachers’ union is well aware of this. The SS option is a bluff, IMHO.

Comment by Rambler Monday, Apr 12, 10 @ 4:00 pm
“But we’re not alone…”

So, EXACTLY, how does this help?

Comment by sal-says Monday, Apr 12, 10 @ 4:06 pm
Steve,

It’s called the Windfall Elimination Provision…

http://www.ssa.gov/pubs/10045.html

Pop the cork and celebrate… you won… in 1983.

I worked at Wayne State in Detroit in the 1990s and had soc sec and a 403b with a 2 to 1 match. That was a pretty good deal, but I left to be closer to my folks.

I do wish these pension-haters would either get a teaching certificate or quite themselves. If there is some reason that’s not viable, let’s change that structure. We call it the “Put Up or Shut Up Provision”. PUSUP!

Comment by Detroit Expat Monday, Apr 12, 10 @ 9:34 pm