The Four Rules of “Too”: The Real Reason Why Illinois Pensions Are in Trouble

From the archive: If you listen to union representatives and their lackeys in the media you will hear this constant refrain: Illinois pension problems are the direct result of the taxpayers not paying their fair share over the last 15 years. This is patently false.

The problem with Illinois public pensions is the result of the “Four Rules of “Too”:

1. Public employee salaries are “Too” high.

2. Public employee contributions are “Too” low.

3. Public employee pensions are “Too” high.

4. Public employee retirement is “Too” early.

Public employee salaries are “Too” high. Teachers’ salaries rise twice as fast as private sector salaries.

This particular chart is related to the Teachers Retirement System (TRS) but it could apply to other state workers too. For example, 35% of Illinois State Troopers make more than $100,000/yr with a high salary of $185,000.

Over the last 10 years teachers’ salaries have risen by 7% per year or 96% compounded and the pension cost (Pension Benefit Obligation) taxpayers are responsible for paying has gone up 116%.  If we look at the rest of us, those working within the Social Security Retirement System, our salaries increased by an average of 3.65% or 43% compounded, less than ½ of the teachers’ increases. Thus although our income has gone up less than half as fast as teachers salaries and pensions we have had to pay more taxes (out of our lesser incomes) to pay the for higher teacher salaries and the higher pensions associated with those higher salaries.

On what exact basis is it justified for teachers to receive annual raises almost twice as high as Social Security employees? What exactly makes them special? Did we, the employer/taxpayer, ever vote for or approve these high salaries? Is $189,000/yr a reasonable salary for a 9-month public employee teaching Music? What justification is there for 12,438 public school employees to be making over $100,000/yr?

Lets take our $189,000 teacher and work backwards by 7%/yr to find his beginning salary 34 years ago. That number would be about $20,000/yr. If we then move forward from $20,000 at 5% per year rather than 7% we end with a salary of about $100,000, still excessive in my estimation for 9 months work but certainly better than $189,000. Why aren’t 5% raises and a $100,000 9-month salary enough for a 56 year-old music teacher?

Public employee contributions are “Too” low.

– And –

Public employee pensions are “Too” high.

– And –

Public employee retirement is “Too” early.

Teachers contribute less but get 3 to 7 times more pension than Social Security workers.

Next let’s compare our $189,000/yr public school music teacher with a self-employed music teacher. Let’s assume the self-employed person begins his career at the same time as the teacher and ends up making $189,000/yr at his earliest retirement date of 62 vs. 56 for the teacher. The public school music teacher pays in 9.4% (8% really but we’ll say 9.4% to avoid an argument) and works 9 months per year for 34 years while the self-employed person pays both the employee and the employer portion of the Social Security tax or 12.4% and works 12 months per year for 40 years.

Here are the disturbing results:

Public Sector Employee vs. Self Employed Person
Music Teacher Public Employee in TRS Music Teacher Self-Employed in Soc.Sec.
Years Worked 34 40
Ending Salary 189,000 189,000
Contribution Rate 9.4 12.4
Total Contributions 231,000 310,000
Pension at Age 56 130,000 Zero, none, nada
Pension at Age 62 150,000 21,000
Total Pension Paid Out 5,800,000 800,000

This simple table shows the stark difference between the public sector pension system and the private sector pension system. Those in the private sector pay more, work longer and get 1/7th as much pension in return. That is an overwhelming argument that teachers (and other public employees) do not pay nearly enough into their plans. How is it possible that they pay less yet receive 7 times as much benefit?

In this example the public teacher has accumulated pension payments by age 62 that total as much as the self-employed teacher will receive over his entire lifetime.

The 5% Solution.

If since 1995 teacher raises had been limited to 5% (35% more than Social Security raises) and they had contributed 5% more of their salary there would be no contribution deficit for TRS although there would still be an investment-loss deficit of about $15 billion. So the so-called taxpayer “shortage” is a simple function of paying employees too much and asking them to contribute too little.

Combine the “5% Solution” with a reasonable limit on public pensions of the median family income in Illinois (about $66,000) and there is no pension deficit at all.

The Union-Politician Industrial Complex leads to unsustainable costs.

Why do the 5% of Illinois workers who are in the state pension system get a special deal while the 95% of workers who are not in the pension system pick up the tab?

That’s a rhetorical question of course. We all know that in Illinois politics he who pays gets. And the teacher unions alone have contributed more than $45 million to Illinois politicians over the last 15 years. The unions give millions and the politicians give back billions. That’s how it works.

And the taxpayers continue to pay, decade on decade, in a form of generational theft no one wants to talk about.

In the end, what is the purpose of taxation?

If the purpose of taxation is providing for the common good, what common good is provided by a $130,000 pension for a 56 year old public employee who has worked 9 months a year for 34 years? And in fact what important public good is being shortchanged by that $130,000 pension?

Taxing for Fire and police services are for the common good, taxes for highways and sewer and water are for the common good. But $130,000 pensions for 56-year old public employees serve no common purpose only a political one. And that represents a political system we can no longer afford or tolerate.

Bill Zettler is a free-lance writer and consultant specializing in public sector compensation.

This article originally posted on June 6, 2010.