By Bill Zettler
#1 Source of the Problem: Salaries are too high.
Basically the pensions are too lucrative and in many cases the salaries are too high compared to similar jobs in the private sector. Since pensions are directly tied to salaries (75 or 80%) the higher the salaries the higher the pensions.
For example in Illinois K-12 last year there were 12,438 employees with salaries in excess of $100,000. This compares with 781 in Wisconsin. Virtually every one of those 12,000 people will either retire with a $100,000 pension or, with the built in COLA, will be over $100,000 before most people get on Social Security which, incidentally, has a maximum of $28,000 at age 66.
In 2009 the top teacher salary was $189,000, the top administrator $368,000. These were not outliers either. The top 100 teachers averaged over $160,000 and the top 100 administrators averaged over $253,000. The corresponding Wisconsin numbers are $84,000 and $142,000 per year. One has to ask the question: why do Illinois educators cost so much? It is not performance because Wisconsin graduates 85% while Illinois graduates 78%.
According to the state actuaries teachers’ salaries (and pensions) have increased at more than 7% per year over the last 10 years as opposed to Social Security wages increasing at 3.4%. That differential cannot continue; how can taxpayers with 3.4% wage increases pay the ever-increasing taxes to fund public employees’ salaries and pensions increasing at 7%?
#2 Source of the Problem: Pensions are too high.
If we look at the TRS and SURS we see that the number of $100,000 pensions has grown by 26% from 2009 to 2010 going from 2,828 to 3,570. That includes 3 pensions over $400,000, seven over $300,000 and 59 over $200,000. Additionally, 14,000 TRS and SURS retirees have pensions greater than $75,000/yr which means with the guaranteed 3% annual COLA they will be over $100,000 sometime in the next 10 years. Add in the people who will retire in the next 10 years we are looking at least 20,000 educators with pensions of $100,000 plus by 2020. Obviously, this is a system the taxpayers cannot and should not have to pay.
In addition, employee contribution rates are much too low. Overall, the 320,000 public employees in the state pension system average a little less than 8% payroll contribution to their pensions. Over the 34 years they typically work for maximizing pensions, teachers K-university actually pay less into the system than a private sector employee pays into Social Security for the same salary to age 66. Obviously there is going to be a serious funding problem when employee contributions for a $100,000 pension at age 55 is less than the contributions for a $28,000 Social Security pension at age 66.
#3 Source of the Problem: ROI assumptions are too high.
The other historical problem is the 8.5% interest rate assumption for all 5 pensions, the highest rate in the country. Under pension accounting the higher the assumed interest rate the lower the pension obligation, which in turn lowers the contribution rate for both the employee and the employer. Thus it behooves the powers that be whether unions or politicians to use the highest rate possible in order to falsely show a low contribution rate. As we talked about briefly before if the rate is 7% instead of 8.5% then the unfunded liability is $104 billion not $78 billion. I know of no financial advisor who thinks we will average 8.5% return over the next 30 years and in fact the return over the last 10 years has been less than 3%.
From a taxpayer’s standpoint the result of this high interest rate assumption is an ever-increasing burden on his contribution because under current pension rules the employee’s portion of the cost is frozen at 8%. Any deficit, in our case $78 billion, is thus shoved onto the back of the hard-pressed taxpayer to pay in its entirety. That is why the current employer rate, that is the taxpayers of Illinois, is 30% of payroll on its way up 40% plus if interest rate assumption is lowered to 7%. This is not only unsustainable and unpayable it is extremely unfair.
Again, using Wisconsin as a comparable state, if investment returns are below the assumed rate pensions are reduced and COLA’s are eliminated. Illinois needs to adopt something along these lines.
#4 Source of the Problem: Employees retire too early.
Lastly, public employees retire too early. Why are some state employees such as state troopers allowed to retire at age 50 on 80% of their last year’s salary including overtime and sick leave buyout? And why are teachers allowed to retire on full pension at 54 and & after 33 years plus two years sick-leave credit? Why can’t public employees work to until at least age 62, the earliest age a taxpayer can retire at on reduced Social Security? In Wisconsin early retirement is at age 57 but at a max of 48% of salary. To reach the maximum of 70% Wisconsin public employees must work until age 67.
I think it would be fair to say most taxpayers have a problem with what they consider to be rather brief public careers. State Police can retire after 27 years and 90% of teachers in the last 5 years have retired after working less than 35 years. University retirees are even worse – the Top 100 SURS pensions in the last year average $114,000/yr with an average of only 28 years actually worked. Personally I don’t think there is any public job worth an $114,000 pension after only 28 years of work. Taxpayers have to work 45 years to reach age 66 and a maximum Social Security pension of $28,000. That huge differential seems inherently unfair to me.
Up next: Part 3.
Bill Zettler is a free-lance writer and consultant specializing in public sector compensation. He can be contacted at this email address. Click here to read more by Mr. Zettler.
