Rick Perry is Right – Texas has a Better Answer for Public Pensions than Illinois Does

Texas plan looks a lot like Tom Cross’s plan part 3

Recently Rick Perry mentioned several public pension plans in Texas that provided substantial pensions for public employees at rather modest cost to taxpayers. This is in contrast to the politically-fueled over pensioned IL system that is costing taxpayers and their children and grand children $100’s of billions.

The goal of the Texas system is to provide a retirement income and life-insurance superior to Social Security for about the same cost. And that has indeed been accomplished.

The Texas plans are in three counties bordering the Rio Grande River: Galveston, Brazoria and Matagorda. This is a conservative area with Republicans Ron Paul and Pete Olson being the local Congressmen.

Why they opted out of Social Security

Up until 1983 municipal governments could opt out of Social Security. In 1981 Galveston decided to leave Social Security and devise their own retirement system. Soon afterwards Matagorda and Brazoria joined Galveston in opting out. Their concern was the long-term viability of Social Security and the ever increasing retirement age and contributions that seemed to be forthcoming. These concerns are even more evident today and in retrospect these counties were well ahead of their time. “Progressive” even.

How it works in Texas vs. how it works in Illinois

In these three TX counties employees contribute 6.13%, slightly less than Social Security and the employers contribute 7.3% slightly more than Social Security. That money is put out for bid each year and is invested in low risk annuities with guaranteed annual returns. Thus there is NEVER a negative year’s return like there is with IL pensions and there is no investment risk for either the employee or the taxpayer. Once the annual payment is made no other payments are due from current taxpayers or their children or grandchildren.

In addition after Texas makes their payment they are done, no more liability – ever. In IL actuaries say we (the taxpayer) must build up $300 Billion in pension assets in order to continue making payments to retirees. That is nothing more than a $300 Billion slush fund for politicians, lawyers, investment bankers and various political hangers-on like Levine, Rezko and Cellini.

And even after the $300 Billion is in the “lock box” we, the taxpayer, are still liable for all investment shortfalls that may occur after wards.

Let’s compare the last 10 years of TRS (Teachers Retirement System) taxpayer contributions vs. the contributions if TRS had been on the Texas system.

Thus if Illinois had been under Perry’s Plan we would have saved more than $10 billion just since 2000 and in addition not left our descendents with an un-payable bill.

(NOTE: Following is from National Center for Policy Analysis)

Galveston vs. Social Security. Upon retirement after 30 years, and assuming a 5 percent rate of return – more conservative than Galveston workers have earned – all workers would do better for the same contribution as Social Security:

  • Workers making $17,000 a year are expected to receive about 50 percent more per month on our alternative plan than on Social Security – $1,036 instead of $683. [See the Figure.]
  • Workers making $26,000 a year will make almost double Social Security’s return – $1,500 instead of $853.
  • Workers making $51,000 a year will get $3,103 instead of $1,368.
  • Workers making $75,000 or more will nearly triple Social Security – $4,540 instead of $1,645.

Other advantages of Texas plan over Illinois Plan

  1. Employees own their retirement funds, including the employer’s contribution and all accumulated interest, from day 1. They can leave and take it with them at anytime. If IL employees leave they only get their contributions without any interest. For Social Security you would have to work at least 10 years to get any retirement payment.
  2. TX Plan includes life insurance equal to 4 times salary with a min. of $75,000 and max. of $215,000 plus the value of their retirement account.
  3. TX Plan includes disability payment of 60% of salary.
  4. In Texas employees can retire at any time since they own their account. They can also leave their retirement account to any beneficiary they choose.

The Texas plan looks a lot like Tom Cross bill SB512 now languishing in Springfield

Tom Cross bill has 3 tiers with Tier 3 being a 401K type plan with 6% contributions by both employee and employer. If that were implemented as the only plan then IL pensions might, I repeat might, survive. See Tom Cross plan.

The Cross plan would allow extra contributions by the employee above the mandatory 6% so if teachers for example were to contribute another 3.4% matching their current pension contribution their results would be even better than the examples given above all without threatening the financial viability of the state and the citizens thereof.

Tom Cross, Rick Perry and Texas all have something in common – the desire to be fair to employees’ retirement plans while being fair to the taxpayers who make it all possible.

So come on Illinois, be like Texas.

Bill Zettler is a free-lance writer and consultant specializing in public sector compensation. He can be contacted at this email address.