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by Jeanne Ives
The public sector unions are going ALL IN to get rid of the Tier 2 Pension System enacted January 1, 2011. They have been telegraphing its demise since the day the legislation was signed into law. And in the last 12 years, they have been intentionally ignoring the need to have Tier 2 evaluated by the federal government for compliance with social security minimum benefits, have passed legislation adjusting pension benefits however they can, and have blocked a mandatory defined contribution plan (401k-style) for new hires.
Now armed with a super-majority Democrat legislature, a union-friendly big government Governor, and a constitutional guarantee to preserve the economic welfare of union workers, the unions are lobbying to end the Tier 2 pension system.
This week in Springfield, Illinois, public employee unions had a Week of Action to undo Tier 2 pension reforms passed in 2011. There is even a Senate Bill ready to do such.
Facing nearly a $100 billion unfunded pension liability – the worst in the nation, a credit rating that was the worst in the nation, and enormous other budget pressures, even the Democrats capitulated to pressure and passed Tier 2 pension reforms in 2010. They adjusted the retirement age, final salary calculation, and cost of living adjustments. Read more HERE.
What they didn’t adjust was the amount that new employees would have to pay in, keeping it at 9 percent of salary. In effect, the state is using Tier 2 employee contributions to shore up the overall pension system, which will pay out Tier 1 employees more generous pension benefits.
In reality, that’s what the new employees signed up for. But make no mistake: If they get their way and end Tier 2, they will convert them to Tier 1 benefits, and the unfunded pension liability will balloon.
If that happens, the budget will be under even more pressure. Secondary concerns will be the pressure to move teacher pension costs to the local level because rich school districts pay rich salaries and then send the pension bill to state taxpayers. If that shift happens, property taxes will go through the roof.
Pensions are a huge discussion that I will not attempt to cover in one place. For now, here are four charts that should alarm Illinoisans. The state has five pension systems. This chart shows how underfunded each system is right now.
The General Assembly passed legislation in 1995 known as the Edgar Ramp, which allows the state to pay a “statutory” amount into the pension system instead of an actuarial amount to bring the systems to 90% funded by 2045.For the past few years the difference between the statutory and actuarial amount has been $4-5 billion.
The Governor’s proposed budget spends $52.9 billion. The total statutory pension payment of $11.265 billion is, therefore, 21% of the state budget. If we paid the actuarial amount of $16.081 billion, that would mean over 30% of the state budget just went to fund someone’s retirement account. This is insanity. No other state pays that much of its budget to pensions.
There are several problems with the pensions. The first problem is that the employee has no market risk and pays a low contribution amount for the benefit they receive. These pensions are very generous. A newly retired teacher with 30 years of service will make a starting pension of $79,224 on average. That will increase at a 3% compounded rate. The MAXIMUM social security payment that an employee pays in 6.2 % of salary and the employer 6.2% is $45,864. The average payment is under $22,000. Teachers argue that they don’t get social security. The truth is they don’t want it.
In this chart, you see that most of the cost of these retirements is borne by the taxpayers (state contribution) – not the employee.
Does your employer put away an additional 50% of your salary for your retirement? That’s how much more taxpayers are putting in for public pensions.
The bottom line is that undoing Tier 2 would accelerate the outmigration of taxpayers who understand the game being played against them and their property. The answer is to move all new hires immediately to a 401k-style program that is already in effect for state university employees. By the way, in this mobile job market, people want the flexibility to own and control their own retirement. A hybrid program should be set-up for public safety individuals like the military went to over twenty years ago.
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