Tom Cross Pension Reform Plan a Start but Is It Enough?

Special re-posting:

Part 1: No it is not the solution.

Illinois House leader Tom Cross has suggested a new plan to resolve the pension funding issue.

It has three new options for current employees (not retired employees):

  1. Employees could stay in the current plan but contribute more. Increased amount would vary by system but average about 5% of salary more. This is known as “Tier 1”.
  2. Employee could transfer to new plan introduced in March of 2010 whereby workers must work until 67 to get full retirement. This is known as “Tier 2” and includes everyone hired after Jan 1, 2011 and all those in “Tier 1” who chose to change to “Tier 2” under the new system.
  3. Employees and the state would both contribute 6% to a 401K/401A Defined Contribution type plan. Anyone from Tier 1 or Tier 2 could select this option.

Below we will look at each of these options in detail. But before we do that we must accept the following caveat:

THE $85 BILLION LIABILITY TALKED ABOUT CONSTANTLY IS A PRETEND NUMBER AND IS ALMOST CERTAINLY TOO LOW (see here).

Tentative contribution rates (of salary) for each of the five pension systems as outlined in IL Senate Bill 512 (SB512).

 

Why would anyone switch to a new plan? Only because they have no other choice.

People in the current Tier 1 category representing 99% of current active members, i.e. current employees not retirees, would have no choice but to switch to one of the three alternatives. In other words under Cross’s plan Tier 1, as currently constituted, is going away never to return. So Cross’s plan is to force people into plans that would be more affordable to the state.

Under the new TRS plan (170,000 active members) teacher’s contribution would be upped from 9.4% to 13.77%, a minor increase of a little more than 4%. If you compare to WI teachers whose pension contribution just went up 5% and MO teachers who pay 14% that seems reasonable considering the value of the pension. I don’t see many teachers, except perhaps very young ones with few years in the current system switching over. If I am right, the biggest potential state savings from teachers will not occur in any significant amount because the state’s contribution rate will only drop from 31% to 27% for all those remaining in the current system.

After taxes teachers would only be paying about 3% more for membership in what is arguably the best pension system in the country.

Ditto for SURS (85,000 active University employees). Although their rate would go up about 5% after taxes no one is going to want to work until 67 when they are retiring at an average age of 59 now. In 2009 the retirees going out with $100K pensions only averaged 29 years work. Think they are going to hang in there for another 8 years and get less just to save 5%?

As for State Employees (SERS – 64,000 active members) over 95% have Social Security and with that as a base some may switch to Tier 2 since they can’t take Social Security until 62 or they may take the 401K so they will have cash when they retire. They also on average make considerably less than teachers or university employees so the jump in contribution rate from 4% to 9% may be more difficult for them to do.

GARS (182 active members) and JRS (966 active members) do not even rise to the level of a rounding error so we will ignore them completely even though looking at the percentage increases they are impressive. Ho hum.

None of these options will diminish the $85 billion ($200 billion?) unfunded.

That’s the $85 billion that might really be $200 billion but why quibble.

The unfunded amount calculated each year is based upon what’s owed as of June 30 to every active employee (employed as of June 30), every retiree and every inactive member (those that are vested but not working or taking retirement yet) minus what we have in the bank. It does not include any changes that may occur in the future.

What SB512 might do is lower the rate of increase in the unfunded each year. From 2011 thru 2031 the pretend-projected unfunded is projected to grow from pretend $85 billion in 2010 to pretend $140 billion in 2031. Based upon most members staying in their current system even with the increased employee contributions that number may drop somewhat but again the $85 billion is a pretend number and if the 8% ROI between now and 2031 is really 4% the funds will be effectively bankrupt before 2031 and it won’t make any difference which plan they are in.

So the Tom Cross plan does not address the key issue affecting the state pensions, which is the Interest Rate assumption (ROI) of the pensions systems. If that number is wrong the increase in unfunded will overwhelm any minor savings induced by the three Tier plan. It is another case of IL politicians being too meek and too beholden to public employees to really effect the massive changes needed from top to bottom.

In Part 2 we will discuss what the Cross Plan should do: retire the pension system – click here to read it.

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

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This article originally posted on August23rd.

 

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