– Richard Ingram is Executive Director of the Illinois Teacher Retirement System. This letter appears in the Winter, 2015 TRS Report to members.
If you have ever heard one of my public presentations about the long-term financial problems we face at Teachers’ Retirement System, you would have heard me say that because I joined TRS early in 2011, I am one of the first members of Tier II within TRS.
While I’m very happy leading a great organization like TRS and interacting with our members, I’m not too happy to be a Tier II employee. Tier II has some big problems that could cost the state and local school districts a lot of money in the future unless it’s fixed.
That’s one of the reasons why a special state task force was convened this fall by legislators to look into the potential trouble created by Tier II and how these future problems could affect the recruitment and retention of teachers in Illinois.
I’m a member of that committee. Tier II is the pension benefit structure created by the General Assembly in 2010 for anyone who had not contributed to TRS or another Illinois public pension system before January 1, 2011. Tier II is designed to help solve the financial problems faced by TRS and the other systems by reducing pension benefits for these new members. Lower pensions means reduced long-term costs for the state.
If Tier II is left alone, it will accomplish its mission. The $61.6 billion TRS unfunded liability will shrink over several decades and eventually be eliminated because the state will pay less to the ever-growing number of Tier II members. In fact, at some point in the future, we estimate that Tier II members actually will help create a surplus of funds for TRS that effectively could eliminate the need for any state government contribution to the System.
But the core of Tier II – the reduced benefits structure – is a problem the Teacher Recruiting and Retention Task Force will review. The benefit structure is unfair to all Tier II members.
Right now, a Tier I member’s pension costs roughly 20 percent of an active member’s salary. Because of the benefit reductions in Tier II, a Tier II member’s pension is worth just 7 percent of an active member’s salary. However, by law, active Tier II members of TRS, like me, pay the same 9.4 percent salary contribution to the System that active Tier I members pay.
What all this means is that Tier II members are paying the entire cost of their pensions plus an extra 2.4 percent to TRS. That extra 2.4 percent subsidizes the pensions of Tier I members. Like other Tier II members, I’m happy to help out, but I’m not really too thrilled with paying for my entire pension and paying extra to subsidize somebody who is paying less than half the cost of their pension. I like all of you very much, but this is a matter of equity for Tier II members.
And someday this subsidy may be declared unconstitutional, which threatens the revenue stream that is designed to eliminate the System’s unfunded liability. We may see a scenario where Tier II members argue in court that the subsidy we pay is really an extra income tax – a tax that only we have to pay. That would be unconstitutional.
The Task Force will investigate whether this problem will erode the ability of public schools in Illinois to attract the best and brightest teachers.
But that’s only one of the problems with Tier II that the new Task Force will discuss.
The second major problem we see down the road is that some Tier II members will be forced into Social Security and those members and their employing school districts will each have to start paying the 6.2 percent federal Social Security tax.
As you know, TRS members’ service in public education is not part of Social Security, so neither members nor employing school districts have to pay that federal payroll tax. But for TRS members to stay out of Social Security, the System’s minimum benefits must be at least as good as the minimal benefit provided by Social Security. It’s called the “safe harbor” provision.
The TRS actuaries project that because the Tier II law limits the growth of Tier II benefits to a rate that is slower than the growth of Social Security benefits, in the future a Tier II benefit will be smaller than the minimum Social Security “safe harbor” benefit.
As we understand the law right now, Tier II members will become Social Security members one at a time as soon as their estimated retirement benefit falls below the “safe harbor.” At that point that member must start paying the appropriate federal taxes. That’s 6.2 percent of salary for a member – on top of the current 9.4 percent contribution for TRS. School districts would have to pay 6.2 percent to the federal government, along with the 0.58 percent that they currently pay to TRS. Because Tier II members will be added to Social Security one at a time, we anticipate it could be an administrative nightmare for school districts, create unexpected strain on local school budgets and impact efforts to hire and retain the best teachers.
Tier II, indeed, has issues. I will keep you posted on further developments from the new Task Force. But already with this Task Force Illinois lawmakers have taken a huge positive step by not burying their heads in the sand. They’re recognizing that the anticipated rewards of Tier II may be more than negated by unforeseen consequences created by the law. The goal of this effort is to fix Tier II so it does not hurt TRS members and Illinois, and with billions of dollars and the future retirements of Illinois teachers at stake, the earlier we get started, the better.
TRS Executive Director