By Bill Zettler
Excess public salaries are the main driver of pension deficits.
The dirty little secret of pension funding problems is the huge salaries public employees earn compared to their peers in the private sector. Take a look at the following chart where the blue line represents the Pension Cost due to public employees from Illinois taxpayers, the red line the Teacher Salary increase compounded over 10 years at 7% per year and the green line representing the average Social Security salary increase compounded over 10 years at an average of 3.65%.
Notice that the blue “Pension Cost” line, with its huge corresponding pension deficit, is correlated to the red “Teacher Salaries” line. This is because as salaries increase pensions increase at approx. the same rate or a little more.
So how do we bring down pensions to the point where they are in a surplus position rather than a deficit position? Simple: lower the Teacher Salary down from the current 7% increase per year to where the Social Security Salary increase is: 3.65% increase per year. Voila – pension deficit suddenly becomes surplus as the Old Pension Cost blue line drops by more than half to the New Pension Cost at the red line.
If teacher’s salaries increased at the same rate as Social Security earners there would be no pension problem.
This shows how the 95% of Illinois workers who are not in the lucrative state pension system are obligated to pay outsize pensions to their peers in the public sector even though their own salaries are not increasing nearly as fast.
Every excess tax dollar required by the state pension system to pay for the privileged 5%, is a dollar less the 95% have for their own retirement.
What the next governor should do:
The most obvious solution is to lower salaries. In Ireland when the financial crisis hit they lowered public salaries by 13% across the board. The governor could do that with the employees under his control and would save $1.5 billion if he followed Ireland’s lead.
However there is a huge swath of salaries that the governor does not control – public schools K-12. At the local school district level, where the soccer moms and soccer dads on the school boards are routinely taken advantage of by well trained and politically supported teacher union reps, salaries continue upward to ridiculous levels. How else do you get $189,000 music teachers, $138/hr 2nd grade teachers and $100,000 plus one-year salary increases?
An easier way to achieve the same goal is to expand on legislation already in effect namely Public Act 94-0004 enacted in 2005 that limits the state’s pension obligation to a certain percentage increase in annual salary over a certain time period; in this case 6% per year for each of the last four years before retirement.
Since PA 94-0004 has established a precedent for limiting annual salary increases over a certain number of years then let us just change the parameters. For example would it be legal to limit increases to say 5% over 5 years? Certainly if we can do 6% over 4 years we can do 5% over 5 years.
So why not 3.65% over 30 or 35 years? In other words tie the state’s pension obligation to the Social Security rate of wage increase with the excess going to where it should have been at the beginning – to those who control the salaries. The local school district would then have to collect more taxes from the local property owners, a much more difficult task than just passing it on to the state. How do you justify higher property taxes to make multi-millionaires out of part-time Drivers Ed and Drama teachers?
For state departments their budgets would be unchanged but if average salary increases exceed 3.65% then other parts of their budget would have to be cut in order to fund the excess pension costs.
This approach has precedent and would serve the dual purpose of lowering pension costs and salaries across the board.