Part 2: To solve the pension problem retire the pension system.
Why is the government in the retirement business anyway?
Political control is the only reason. If the state controls the future retirements of the state employees then they control a huge block of voters and donors. They also can hand out favors to powerful commercial interests such investment bankers, advisors, consultants, brokers and, of course, attorneys.
So the solution to those massive sources of special interest and ethical conflict is to retire the pension system now. Free up public employees from being dependent upon politicians for their well being. Free up taxpayers from being stuck with the bill for pension special interests.
Eliminate Tier 1 and Tier 2 and just convert all employees to 401K type plans.
Whatever plan you put forward is going to trigger a lawsuit so why not go with the plan that will permanently solve the problem: all employees, current and future on 401K plans.
Besides if you are going to take the heat and generate a lawsuit anyway why not really do something significant and implement only the 6% 401K plan for all employees, no other option available? If the 3 point Cross plan is legal then the 6% 401K would be legal by itself. So get rid of Tier 1 and Tier 2 altogether.
And if they put the 6% 401K state contribution back on the employers where it belongs (school districts would pay it directly and state entities would have it forced into their current budgets) all increased pension costs over the next 35 years would be eliminated because no new employee salaries would be entering the system, whether raises or new hires. This would retire the pension system almost completely over the next 35 years as every year the states funding obligation would be getting smaller and smaller as current members retire and no new members enter. And keep in mind all the current members pensions would be frozen at the rate earned as of the conversion date. So a teacher with 10 years would get 22% when they retired (plus their 401K), 5 years would get 11% etc.
Why converting everyone to 401K/401A plan would save approx. $200 billion.
Under the current plan taxpayers have to build up assets in the pension plan from $50 billion now to about $300 billion in 2045 all the while paying current and future pensions. That’s required to support the 90% plan i.e. have enough money in the bank to pay pensions going forward from 2045 with mostly investment returns.
Under the new plan we would use the $50 billion we have now to subsidize the current pensions we have to payoff over what in effect is the next 65 years (new hires this year work for 35 years and retire for 30 more). We don’t have to raise $300 billion by 2045 or pay for any newly accrued pensions and therefore our annual payments will be much less. By 2045 there will still be a lot of pensions being paid out but they will be at a very low rate since by 2045 no new people would have entered the pension system in 35 years and those that did (those working in 2011 who are vested) would be paid off at an ever lower percentage of their salary (as low as 2.2%).
The following table is just an estimate or “model” of future savings. I have complained about “models” before as not being definitive since they have an infinite number of possible outcomes based upon the assumptions made (see here). So these numbers are one estimate but Cross could get the state actuaries (who have more info than I do) to do a similar estimate.
Why not do that right now?
Assumptions for above:
- 25% of employees in the 5 state pension systems are not vested (2010 numbers). They would be due return of contributions not pensions.
- 3% COLA is eliminated. Colorado and MN have recently won lawsuits on this matter.
- Salary increases are limited to 3%/yr. Increases above that number for vested employees would require additional contributions from employers/employees.
- Mortality rate are assumed to be 2%/yr from age 58.
- Original $2.8 B increased by 4%/yr until 2032 when it would revert to an amount needed to pay remaining benefit.
- If assumed 8% ROI is not accomplished additional contributions would be made by employers and/or employees not the state.
- School districts pay entire 6% 401K/401A employer contribution not the state.
- Assumes $42,900 as average current payout and $78,000 average salary at retirement (TRS numbers).
The new system would be better for employees too.
The new system would be better for employees and release IL politics from the death-grip that politicians and unions have over not only taxpayers but public employees. Employees could quit and move on taking their retirement funds with them without being penalized. No one would have to remain a public employee in a dead-end job because they were afraid of losing their pension. Every penny of the contributions and investment gains is theirs to do with as they wish both their contributions and the states. And there is no vesting period – if you leave after a year you take employee and employer contributions with you as well as all investment gains.
Currently if you leave the system before you retire and want to take your money with you, you only receive your contribution back without interest. You get none of the state’s contribution. In effect you are a slave on the pension plantation.
And employees could make additional tax free contributions above the 6% if they so choose.
Do Illinois politicians have enough courage to propose this plan?
The word “courage” and “IL politician” are seldom found in the same sentence and for good reason. I am hopeful but not optimistic.
The 401K plan is already on the table and this new approach is actually much simpler and easier to implement than the original bill. No confusing tiers and give backs. Just a simple solution everyone understands and which in my opinion will save the pensions already committed to without bankrupting the state and threatening all pension systems.
So Tom Cross, step up and take IL into a new and prosperous future. After all it’s right there sitting in front of you.
The 95% of IL workers not in the state pension system are waiting for your courage. But we are not going to wait forever.
Bill Zettler is a free-lance writer and consultant specializing in public sector compensation. He can be contacted at this mail address.