| This week, as many of us were busy tidying up last-minute details in preparation for Christmas and New Year celebrations, important stories on a myriad of issues came out. One of those stories will likely be the subject of one of the biggest debates in next year’s Spring legislative session in Illinois, and taxpayers better beware. The Commission on Government Forecasting and Reporting released their special pension report noting that total Illinois pension debt rose again and totaled $143.7 billion in market value, just shy of the record unfunded liability of $144.7 billion in 2020. It’s worse than that, though. A recent Fitch report, highlighted in this Center Square article, shows “Illinois’ unfunded pension liability, when including other post-employment benefits, is $206.5 billion.” Another important story related to this is the passage of the Social Security Fairness Act by Congress, which was passed with the help of Republicans. WSJ’s editorial called it A GOP Gift for Randi Weingarten – The Senate is poised to rob $196 billion from Social Security for public union workers. Both stories should impact how Springfield politicians react to the cry to adjust Tier 2 pension benefits. Before your eyes glaze over and you decide not to read any further, please stick with me on this topic. I can’t, and won’t, explain 13 years of pension information I have been collecting and learning about in a couple hundred words – which is all most readers are interested in reading about – but there are some really important aspects you must understand. First, some resources. Illinois Policy Institute wrote about the latest surge in pension debt HERE. Wirepoints wrote about the pension issue most recently HERE and HERE. And Ted Dabrowski, President of Wirepoints, will be on my radio show tonight, Sunday 12.22.24, to discuss this issue. Tune into AM 560 from 7-9 pm. I used information from the latest Illinois Teachers Retirement Fund Comprehensive Annual Financial Report from FY23, which is linked HERE. Teachers’ Retirement System (TRS) represents the largest pool of public employee pensioners in the state. I read the more recent TRS Preliminary Actuarial Valuation and Review, dated June 30, 2024, which is linked HERE. Here’s the bottom line – Illinois pensions are extremely generous and entirely unaffordable. The cost, over 20% of the budget at the state level, crowds out other spending, forces tax hikes at the local level, and prevents tax relief at the state level. What’s more, the politicians plan to make the situation even worse. In 2011, Illinois adopted a Tier 2 pension system for all new hires. In Tier 1, employees can retire in their mid-fifties with a pension equal to 75% of the average of the highest four years of salary after 35 years of work and also receive a guaranteed compounded COLA of 3% annually. Under this scenario, pensions literally double in 25 years. The employee only put in 9% of their pay. Under Tier 2, employees can’t get full retirement until age 67. Their pension is determined by the average of their highest 8 years of salary in the final 10 years of service, capped at just about $126,000 (this year), and their COLA is 3% or ½ of CPI, whichever is less, not compounded. They still put in 9% of their salary towards their pension. The pension is dramatically different than Tier 1. Employees hired under Tier 2 knew or should have known they would do the same work for a lesser benefit. This isn’t unusual. Companies, the federal government, and other states have all adjusted retirement benefits along the way. But Tier 2 employees, with union power backing them, want more. They have also been given an argument that perhaps Tier 2 benefits are out of compliance with federal social security minimums. Instead of actually figuring that out, they have gone to the legislature to ask for blanket changes. If those changes go through, the pension costs will skyrocket – and then so will taxes or other services will be cut. Then all taxpayers become is a piggy bank for someone else’s multi-million dollar pension. This issue, again, gets super complicated quickly. There is a lot of unfairness in Tier 2. They pay in the same as Tier 1 colleagues, do the same amount of work, and get a much less benefit. However, they are still getting a good retirement, and most Tier 2 employees, except for the highest earners, who are typically school administrators, will almost certainly have a better retirement than with social security. For the record, here is a chart of how much current retirees make in TRS. This is the latest report.  A new retiree with 35 years of service makes $7,543 per month or $90,516 annually. This retiree is, on average, only 60 years old.In contrast, according to Kiplinger’s, the maximum social security check in 2024 if you retire at 67 is $3,822 or $45,864 annually – that’s half the benefit and a much longer age requirement than Tier 1. If one waited and retired at age 70, the maximum check is only $4,873 per month or $58,476 annually, still much longer working time for a much less benefit. What about a Tier 2 retiree? How does that compare to current social security calculations? This is just my estimate, but it is likely not that far off. According to TRS information, a current TRS member (includes administrators, teachers, and some support staff) who started teaching in 2011 under Tier 2 is making an average $77,583 at year 13 in the system. Averages are deceiving as these charts include Superintendents making over $200k. But many teachers will likely hit the current salary cap and will likely have been at that level for 8 of the last 10 years. If so, they can expect an annual pension of 75% of their average salary. Just using the current cap of $126,000, their pension would be over $90,000 as well. Even if a teacher’s final average salary was $75k, their pension will be much higher than the average social security recipients who earned at that same rate. Government employees can expect that these calculations will be subject to adjustments for salary cap increases. Meanwhile, social security recipients can expect insolvency in the fund beginning in 2035, which means significant benefit cuts or massive new employment taxes. While I could go into infinite more detail, and I started to before deciding to simplify the discussion because, after all, it is Christmas, and I have things to do, I did want to pull in the other article I highlighted about the Social Security Fairness Act. I have heard complaints from public employees about not receiving social security benefits due or receiving reduced benefits even though they paid into the system through other jobs. WSJ explains why this is so in the editorial I mentioned and linked to above. They also explain why that provision should not be changed. Here is an excerpt: The House last month passed the misnamed Social Security Fairness Act, 327-75. Senate Majority Leader Chuck Schumer vowed at a rally with union leaders last week to hold a vote on the bill this week. “What’s happening to you is unfair, un-American,” Mr. Schumer declared to cheers from teachers union chief Randi Weingarten. What’s unfair is rewarding high-paid government workers with larger Social Security benefits than they earned. That’s essentially what the bill would do. Social Security payments are based on worker contributions and average monthly earnings over the highest 35 years of compensation. They are also progressively indexed, so higher-paid workers receive a benefit that replaces a smaller share of their earnings. Ergo, an investment banker, receives a smaller wage replacement rate than a retail clerk. But what about teachers and firefighters? Many state and local government employees who receive pensions don’t pay into Social Security. Instead, they earn pensions that are far more generous than the average Social Security benefit. Many can also retire as early as 50 and then work in private industry while receiving their government pension. Here’s the rub: Government workers who spend some of their career in private industry are entitled to Social Security benefits. However, the standard Social Security formula treats years employed in government as if workers have zero earnings. This reduces their average earnings in the equation and thus increases their wage replacement rate. As a result of this formula quirk, government workers who spend some years with private employers would get a relatively larger benefit than similar-earning workers who spend their entire careers in private industry. Congress in 1983 sought to fix this injustice with the Windfall Elimination Provision (WEP), which reduced benefits for such government workers. Government unions have long pushed to repeal this provision as well as a 1977 law that ensures government workers don’t receive outsize spousal benefits under the Social Security formula. Ms. Weingarten’s ship has finally come in as some Republicans cozy up to unions. Never mind that repealing these two Social Security adjustments would benefit workers in government unions who paid less in payroll taxes. High-earning government workers would also benefit more than lower earners. I can understand the unfairness of the system on the part of public employees. The reason this conflict even exists is because the purpose of social security has been distorted over the years. What was supposed to be a system to ensure low-income workers have a small amount of guaranteed income – had to put a restriction on higher wage earners. That meant a school teacher with a side gig as a summer tutor got caught up in the adjustment. Both our public pension system and social security need an overhaul. Social security -for average workers – gives a one percent return after working 40 years. Our pension system has taxpayers assuming all risk, and has created unfairness between the tiers and also with private workers who fund them. That brings me to my final point today. Government employees need to be in a modernized system. Taxpayers assume all risk right now for very generous defined benefits. I have actually been told by teachers that they can’t be expected to manage their own retirements as they aren’t capable of doing so. This is ridiculous. Private teachers, truck drivers, office workers, and a myriad of other workers manage their own retirements and assume the risks. Enough of separate retirement systems for government employees. And public safety employees can adopt the same hybrid system that our U.S. military adopted decades ago. There is so much more to cover on this, but it will have to wait. |
