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About that pension reform proposal…

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Illinois

* I asked longtime commenters and pension experts RNUG and Arthur Andersen to take a look at the Illinois Policy Institute’s latest pension proposal.

Let’s start with RNUG. You can see all of his work by clicking here (that link also includes the group’s full explanation, by the way). But this is his summary…

The Bad (from a taxpayer and / or employee perspective)

1) In terms of fixing the pension underfunding, it is a “kick the can” plan not much different than the Edgar Ramp.
2) It is a Defined Contribution plan that shifts both investment and retirement risk to the employee. Your 401K is all you have; no AAI, and if you invest poorly, no one to bail you out.
3) Most likely, it will force local schools districts to raise local / property taxes.
4) Universities may have to raise tuition.
5) Community colleges will, most likely, have to do a mix of 3 and 4.
6) Encourages employee turnover because there is no significant benefit / reason to stay employed at the State.

The Good (from a taxpayer and / or State perspective):

1) For about 8 – 9 years, State contributions to the pension funds will be lower than under the current Edgar Ramp.
2) It transitions the State out of the Defined Benefit business, reducing the risk to the State. As part of this, it eliminates
any AAI.
3) Encourages employee turnover, which might l;ower salary levels because people will have less longevity.
4) Shifts future liability for all TRS and a portion of SURS from the State to the local entities.
5) If Tier 2 is completely abandoned, removes future risk of Tier 2 violating “Safe Harbor” rules
6) Effectively gets the State out of the pension business by 2047 or so.

* And AA gives us his “first read observations”…

1) They aren’t saving $1 billion in 2018, they’re shifting it from the State to schools and universities. Where we stand today, which ones can afford to pick up that cost?

2) The “extrapolation” of TRS figures to SERS and SURS is seriously flawed. The three funds have very different member bases, salary schedules, and demographics. No actuary would tell you that is a sound method.

3) Fixing Tier 2 has to be done, and sooner rather than later. Their approach is off the mark. The fix for Tier 2 is either reduce the member contribution or increase the benefit. Their plan doesn’t do either one.

4) Their proposed contribution rates are a bad idea. The rates are different for the 3 systems because the benefits are different. Charging an SERS member 8% for a benefit that is lower than the SURS/TRS member is just a different flavor of the Tier 2 problem. On the other hand, the proposed 7 percent employer contribution is too low to cover the current employer’s normal cost, or the employer’s share of currently accruing benefits. Working from memory, I think TRS’ is around 17-18 %, with the employee’s share being 9%, leaving the employer cost around 8-9 percent.

5) It’s settled fact that 401(k) plans are more expensive to administer. (Not a biggie, relatively, but it should be considered.)

6) The SURS experience is instructive. When offered the choice, less than a third of SURS members selected the 401(k)-type benefit option. This option is a popular choice among faculty who don’t expect to spend a career in Illinois, so the “portability” is desirable. I don’t know that this experience is typical among other employee groups-I doubt it.

Conclusion-typical IPI half-baked baloney. About the only positive thing I can find to say about it is that nothing is blatantly unconstitutional.

posted by Rich Miller
Monday, Feb 6, 17 @ 12:25 pm

Comments

Hard to believe it will take 30 years to get Illinois out of the pension business. This is an effort that should have been started long ago but at least the conversations are happening now.

Comment by Maximus Monday, Feb 6, 17 @ 12:45 pm
Excuse mi ignorance, but what are the issues with Tier 2 that need to be fixed? I’m Tier 2 and I thought it was the least of their worries. They want to make Tier 2 even less attractive? Is that possible? Thanks.

Comment by Anonymous Monday, Feb 6, 17 @ 12:47 pm
I want to point out AA’s 5tg point

There it is. Profit
It’s why Rauner and IPI want it.
Man would investment firms make out great
Billions

Public employees serve the PUBLIC
NOT PROFIT

Profit driven perfidy
Plain and simple

Comment by Honeybear Monday, Feb 6, 17 @ 12:51 pm
Anonymous, since Tier 2 is provided in lieu of Soc Sec and some Tier 2 employees may actually receive worse benefits than they would have under Soc Sec, the State may be in violation of federal law. In other words, Tier 2 is not at risk of becoming less attractive. On the contrary, at some point in the future the state may be forced to retroactively make Tier 2 MORE attractive!…Which could be really expensive.

Comment by Jason Horwitz Monday, Feb 6, 17 @ 12:51 pm
== less than a third of SURS members selected the 401(k)-type benefit option==

Not surprising because the default retirement plan option in SURS is the pension. Make no choice, get the pension. Change the default to the “self-managed” plan and see if enrollment increases.

Comment by City Zen Monday, Feb 6, 17 @ 12:51 pm
Wondering why any utterance of IPI is given consideration. Total right wing baloney mill.

Comment by 61571 Monday, Feb 6, 17 @ 12:59 pm
“”No man’s life, liberty, or property are safe while the legislature is session.” Those who created the pension problem now blame the recipients. What an insult! May not be original, but needs to be said over and over…….

Comment by Robert Nanni Monday, Feb 6, 17 @ 1:02 pm
Nice try, City Zen. As the article correctly indicated, some, such as myself, chose self-managed plans because of portability. But we were all very well informed. As we all learned in 2008, the 401k option can be risky if you retire at the wrong moment. The same happened in the dot.com bust. And what if one lives too long? Old school pension plans have great advantages. Back when the same companies were on the fortune 500 for 100 years, pensions worked in the private sector too. But rather than replace the old pension systems for everybody, we attack those in the one remaining sector of the economy that still has them?

Why? Misery loves company.

How about instead of attacking state workers we go after the corporate raiders like Rauner who have destroyed the old pension system and who now seek to profit even further.

I suppose you also oppose legislation giving investment advisers fiduciary responsibility to serve the best interest of clients. Wouldn’t want put limits on sociopathic predators like Rauner, now would we.

Comment by HistProf Monday, Feb 6, 17 @ 1:08 pm
Nice analysis, but what are the alternative facts?

Comment by Dr X Monday, Feb 6, 17 @ 1:15 pm
Great analysis by our resident experts AA & RNUG. Of course I’m not surprised by the deficiencies of IPI’s plan. They’re better at propaganda than developing realistic policy proposals.

Comment by Norseman Monday, Feb 6, 17 @ 1:15 pm
@Jason Horwitz - Thank you!

Comment by Anonymous Monday, Feb 6, 17 @ 1:16 pm
I would guess (just a guess) that fewer than 10% of TRS would move to a 401k. Looking back to 2008, 401k’s proved to be a real challenge and the presidents removal of the “fiduciary” responsibility requirement from Dood/Frank makes 492k’s a perilous choice.

Comment by JS Mill Monday, Feb 6, 17 @ 1:18 pm
== Hard to believe it will take 30 years to get Illinois out of the pension business. ==

Depending on where you want to measure from, it took us over 100 years to dig the hole this deep.

Comment by RNUG Monday, Feb 6, 17 @ 1:20 pm
@HistProf - You may want to read up on Central States Pension Fund current predicament. But I’ll bite…

How exactly would my pension work in today’s private sector? If I change employers every 7 years? What if one of those employers went out of business or merged with another company with worse pensions? Or I worked at a start-up too small to afford a pension? What’s my final pension look like? Is it 75% of my highest salary?

It’s not about the misery, as you say. I leave that to social security. But if you have a 21st century pension plan that mirrors 21st century employment reality, I’m all ears.

Comment by City Zen Monday, Feb 6, 17 @ 1:31 pm
“About the only positive thing I can find to say about it is that nothing is blatantly unconstitutional.”

Agree or disagree with the proposal, this statement is the most important. The pension system has to be revised in order for the state to get out of the hole.

Furthermore, if nothing does change, state employees should beware of 2020 potential Constitutional Convention.

Comment by Anon123 Monday, Feb 6, 17 @ 1:32 pm
I have always thought that the decline in popularity and usage of the defined benefit pension plan would have negative social as well as economic consequences for our country. I know way too many employees who will be unable to manage their retirement funds to last for the duration of their lives. When the money runs out they’ll be back on the public dole in one way or another.

Comment by Original Rambler Monday, Feb 6, 17 @ 1:33 pm
Thanks for the insights. These folks need to remember that the combined employer contribution for Social Security and Medicare is 7.65%. It isn’t possible to get the employer costs any lower than that, at least since 1936.

Comment by Excessively Rabid Monday, Feb 6, 17 @ 1:35 pm
Next, the IPI needs to study the cost of illegal immigration on Illinois schools, hospitals, welfare/food stamps and social services. Please submit a 4 page report on what all of this costs the taxpayers.

Comment by Greg76 Monday, Feb 6, 17 @ 1:38 pm
One thing about SURS self-managed plan or other possible 401K-type plans - the State has to actually make the 7% annual contribution into the participant’s account on a very regular basis. No IOU’s or kicking the payment down the road. Can the State really afford that for a lot of people?

Comment by Joe M Monday, Feb 6, 17 @ 1:43 pm
Pushing pension costs to local schools while freezing taxes and giving them more ability to renegotiate union contracts virtually guarantees a labor war in every school district. Whether this is a feature or a bug depends on your perspective.

Comment by Anonymous Monday, Feb 6, 17 @ 1:44 pm
Many years ago, when selecting Education as a career, I understood that the earning potential would definitely be lower (no career movement, other than administration, no bonuses, stock options, company credit cards, no company car/gas/insurance, etc.) but that I would have security in my old age, when one tends to have need for that. It was a consideration, certainly not a focal point that determined this choice.

Fast forward to now. Who in their right mind would bother teaching when there are a bazillion other options for bright folks who love to learn and do so easily? If college degreed-or multi degreed -people have a choice why choose such a limited career with no end benefit? Folks complain about needing to bring up credentials for teachers? Hah. Good laugh. Soon high school grads will be teaching your grandkids because no one else will.

Comment by Anonymous Monday, Feb 6, 17 @ 1:45 pm
== Hard to believe it will take 30 years to get Illinois out of the pension business. ==

IIRC - Illinois got into the pension business to avoid paying 7.65% of payroll into Social Security and Medicare.

Comment by Hamlet's Ghost Monday, Feb 6, 17 @ 1:45 pm
Question for RNUG regarding: “5) If Tier 2 is completely abandoned, removes future risk of Tier 2 violating “Safe Harbor” rules”

Isn’t there risk of a DC plan violating Safe Harbor? If the investment earnings for an individual are poor isn’t their benefit reduced and possibly reduced below the value of the SS benefit?

Comment by Name/Nickname/Anon Monday, Feb 6, 17 @ 1:45 pm
Thanks for the insight, RNUG and AA.

From my perspective, the politics are clear:

– shift costs to school districts (while also freezing property taxes) so they’ll beg for that bankruptcy protection that will allegedly bust unions.

–do the same to higher ed (plus cut state funding even further) and make them beg for the means to gut collective bargaining and prevailing wage.

It’s almost as if the governor wrote it himself, lol.

Comment by wordslinger Monday, Feb 6, 17 @ 1:49 pm
My copy was a bit hard to read since it’s on my phone. But was it considered that if Tier 2 is eliminated, then that subsidy they make for the state’s Tier 1 payment, would then have to be made up by the state? So the state would be shifting part of the Tier 1 cost back to itself. That is fair to Tier 2 people, but still would be an additional cost that the state would incur.

Comment by A Jack Monday, Feb 6, 17 @ 2:04 pm
==Most likely, it will force local schools districts to raise local / property taxes.==

…which is impossible for schools in PTELL counties, or in all school districts if a property tax freeze is passed by the General Assembly.

Comment by Old Shepherd Monday, Feb 6, 17 @ 2:05 pm
Hamlet’s Ghost — Illinois got into the pension business to avoid paying 7.65% of payroll into Social Security and Medicare –
Nope, the state pension systems were created in the early 1940’s, way before Social Security and Medicare cost 7.65% of payroll.

As for the default retirement for SURS being the traditional DB plan, there is some merit in believing that the default option contributes, at least to some degree, to the majority of SURS members being in that Plan.

Comment by Retired SURS Employee Monday, Feb 6, 17 @ 2:05 pm
Name/Nickname/Anon

To your question about DC violating Safe Harbor, from my reading of the federal regulations the answer is no. This is because all that is required if it is a DC plan is that the total contribution rate from both the employee and employer be 7.5% of salary–meaning the employer could contribute 0% and the employee could be contributing the full 7.5%. See https://www.irs.gov/pub/irs-pdf/p963.pdf

Comment by Not RNUG, but know pensions Monday, Feb 6, 17 @ 2:15 pm
SURS member here, came to IL in early 00’s with existing TIAA accounts from out-of-state universities. Wouldn’t touch the traditional DB SURS option with a ten foot pool. Self-managed options with TIAA (not sure about Fidelity) can be adjusted to significantly reduce market risk, long-term growth means I’m likely to retire with annual payout higher than annual salary. Not a bad deal.

Comment by Flapdoodle Monday, Feb 6, 17 @ 2:18 pm
The same politicians who bailed out auto companies because their legacy pension and healthcare plans bankrupted them somehow think that government pensions are immune to these same pressures.

Comment by Lucky Pierre Monday, Feb 6, 17 @ 2:25 pm
I read the analysis on the link provided, but I am a little confused. Is there no social security component to go along with the 401k in the new plan? If not, Illinois is going to end up with some very broke former State Workers about 10 to 15 years after they retire. If a 28 year old is hired by the state in a $50k per year job and works there for the next 37 years with an average raise of 2% per year and a conservative 5% per year investment average, they will end up with a bit more than $1 million when they retire. Without a social security supplement, that likely won’t last more than 15 years assuming that the cost of living keeps rising at normal rates of inflation over that same period of time.

Comment by Benniefly2 Monday, Feb 6, 17 @ 2:30 pm
–The same politicians who bailed out auto companies because their legacy pension and healthcare plans bankrupted them somehow think that government pensions are immune to these same pressures.–

Huh? Which same politicians are those?

Have W and Obama weighed in on the IPI “plan” or something?

Comment by wordslinger Monday, Feb 6, 17 @ 2:37 pm
We do already have a self managed plan through Deferred Comp that is subject to the whims of the market. I fail to see why I would want a 401(k) as well.

Comment by A Jack Monday, Feb 6, 17 @ 2:58 pm
==Is there no social security component to go along with the 401k in the new plan? If not, Illinois is going to end up with some very broke former State Workers about 10 to 15 years after they retire.==

Not necessarily. The state contributes 7.6%. Percentage-wise, that’s like your employer paying SSI plus a 1.5% 401(k) match. Keep in mind most private sector employers match maybe 3%, if that, and you may not fully vest for a number of years.

And don’t forget the SURS members don’t have to flush 6.2% of their salary down the SSI toilet their entire careers. They can take that money and invest in their own private annuity, something that will pay off far better than SSI.

Comment by City Zen Monday, Feb 6, 17 @ 3:01 pm
Lucky:

The pensions of people currently in the system have to be paid. Period. Stop harping on it and trying to figure out ways to twist yourself into a pretzel trying to get around the Supreme Court rulings.

Also, it’s pretty laughable to compare the auto industry to state government.

==The same politicians who bailed out auto companies ==

Newsflash. The State of Illinois and its state politicians weren’t involved in that. So I have no idea what your point is other than to hear yourself talk.

Comment by Demoralized Monday, Feb 6, 17 @ 3:01 pm
== But was it considered that if Tier 2 is eliminated, then that subsidy they make for the state’s Tier 1 payment, would then have to be made up by the state? ==

They said they considered it.

Comment by RNUG Monday, Feb 6, 17 @ 3:05 pm
Anon123 ==Furthermore, if nothing does change, state employees should beware of 2020 potential Constitutional Convention.==

Only if you’re talking about a federal convention that might repeal the contracts clause. The Illinois constitution says the employees’ pension rights are contractual, and the federal constitution prohibits states from reneging on their contracts. Repealing the Illinois pension clause will not affect the current unfunded pension obligation, which is the only real problem for the state.

Comment by Whatever Monday, Feb 6, 17 @ 3:10 pm
All tier 1 employees should have their salaries frozen.

Comment by Ron Monday, Feb 6, 17 @ 3:20 pm
CityZen,

Multiple ways to help: lift the cap on social security would be one. (It’s a regressive system, after all.) Use the revenue to expand the system into a German style pension system. You would still want to have a 401 k, but for people on the bottom end, it could be a lifeline. And it would help in the middle. People on top are doing just fine.

Comment by HistProf Monday, Feb 6, 17 @ 3:24 pm
Should have added: Make S.S. taxes actually progressive and we could go even further.

Comment by HIstProf Monday, Feb 6, 17 @ 3:27 pm
SSI also needs to have retirement age extended.

Comment by Ron Monday, Feb 6, 17 @ 3:30 pm
@HistProf - I appreciate the try, but you still haven’t created the TRS-like pension I need for retirement. I require 75% of my highest pay while contributing only 9% total of my wages across multiple employers of varying sizes and financial means.

Comment by City Zen Monday, Feb 6, 17 @ 3:54 pm
All tier 1 employees should be frozen!!

Comment by Customer Monday, Feb 6, 17 @ 4:06 pm
Fair. You still need your 401 K. I’m just suggesting we increase the defined benefit portion of the portfolio by expanding s.s. rather than “reforming” entitlements alla Paul Ryan.

And your 75% figure only goes for the low end. I see no reason for public policy to help the upper end retire into splendor. They have their own investments for that.

And my MAIN point is that we Illinois voters need to pony up and fulfill our obligations under both the contracts clause and the Illinois Constitution. (Hint: we are going to have to do so anyway. Sooner the better.)

I was reacting to what seemed like a veiled implication that defined benefit packages for state employees are somehow illegitimate because you and I don’t have one.

Because Government entities do not pass out of existence through bankruptcy, public workers should still get the better plan. They are often paid less, so it helps recruitment.

In addition, one could make it more difficult for management to shed its obligations in bankruptcy. In general I would like to see some of that “personal responsibility” ethic fall on the heads of our corporate overlords. If they take the firm into bankruptcy, how about THEY lose everything but one car and modest house?

Comment by HistProf Monday, Feb 6, 17 @ 4:16 pm
A further idea: make stock options subject both to income and SS taxes. Only seems fair. I’m not an actuary. If we plug away at it, can we make something of S.S.?

Comment by HistProf Monday, Feb 6, 17 @ 4:20 pm
And thank you for the engagement. I appreciate it. (No snark.)

Comment by HistProf Monday, Feb 6, 17 @ 4:21 pm
Interesting…

Under the “good” section:

3) Encourages employee turnover,

Q: So now we’re going to make jobs so crappy workers simple leave?

Is this how the future is supposed to look?

-glad I’m not younger

Comment by 33rd ward Monday, Feb 6, 17 @ 4:42 pm
RNUG: Having heard all kinds of arguments about the potential “safe harbor” risks with Tier 2, do you have your own guesstimate of how much, for how many and when? My initial take was that they are both minimal, and ultimately manageable, but the details have escaped my memory.

Comment by walker Monday, Feb 6, 17 @ 4:51 pm
It’s all part of, ‘Running Illinois like a business.’

Comment by Anonymous Monday, Feb 6, 17 @ 5:07 pm
“Effectively gets the State out of the pension business by 2047 or so.”

RNUNG, if every Tier employee is moved into Tier II, no one will be paying into the current pension fund for retirees. Therefore, how will it be funded until 2047 when the governor(s) can chose not to put money into that fund?

Comment by Mama Monday, Feb 6, 17 @ 5:38 pm
Thanks, RNUG, AA and Rich. No way we can get expert, detailed analysis like this anywhere other than CapFax.

Comment by up2now Monday, Feb 6, 17 @ 6:26 pm
@HistProf - Props to you as well…you get an A for effort. I’m not sure I’m on board with your Social Security plan though. While I understand lifting the SS cap would help a lot, it wouldn’t really help the middle class professionals (the public sector equivalents). SSI has a horrible rate of return for those folks.

My inquiry wasn’t to disparage pensions, but just to demonstrate how difficult it is to replicate in the private sector.

Comment by City Zen Monday, Feb 6, 17 @ 6:40 pm
== All tier 1 employees should be frozen!! ==

Other than not giving raises, they can’t touch Tier 1. The Kanerva and Sb-1 cases pretty much settled that.

Comment by RNUG Monday, Feb 6, 17 @ 9:12 pm
In a perfect WORLD …darn auto-correct

Comment by RNUG Monday, Feb 6, 17 @ 9:55 pm
As I have indicated before, I read the IPI pension proposal and the cost savings it assumes are based on the assumption that every tier 2 employee (and even some younger tier 1 employees) will switch to the defined contribution plan, even though, since 2011, new SURS tier 2 hires had that choice and consistently less than 20% have chosen it. OK, I get that the traditional plan is the default choice, but still - do you seriously expect me to believe that 100% of folks who have already rejected the self-managed plan in the past will now change their minds and choose it? This is simply laughable.

Comment by Andy S. Monday, Feb 6, 17 @ 10:22 pm