Last week when I reported that Representative Nekritz’ House committee was holding hearings on Republican proposals for a pension buyout, IEA Retired leadership sent out an email to members which dismissed as rumors the latest threats to our pensions.
They echoed the song I sing with the kindergarten and first grade kids in my uke class. Don’t worry. Be happy.
A few days ago, the IEA finally felt the need to comment on the latest pension attack. They emailed some local leaders: “Rest assured that if anything does ‘stick’ to the wall that has an impact on us, IEA will be there letting us know what is going on and how we can get involved.”
Apparently TRS Executive Director Richard Ingram – someone who is not usually too
outspoken rash about threats to the pension system – felt the need to testify before legislators on the buyout proposal.
In his view, if not the view of the IEA and IEA Retired, the proposals represent a real threat – not a rumor -and a benefit cut.
It must be stated that any buyout — whether it be full or partial, at retirement or before, rolled over into an IRA or used to purchase an annuity — is a reduction in the guaranteed benefit that the member may have earned up to the point of the buyout.
While the proposals may have a certain appeal to some, and potentially positive perceived benefits, we should study carefully as to whether we might expect any significant benefit from them.
I can see few instances where prudent financial considerations would lead a member to take a reduction in a benefit that has been guaranteed by the Illinois Constitution and reaffirmed by the Supreme Court.
Such instances would be rare and likely due to unusual personal circumstances.
They will likely often reflect what is termed adverse selection.
An example would be a member who has a terminal illness and who can determine that the lump sum will provide a bigger payout than the monthly benefit.
Further, accepting a buyout would place the members’ assets subject to the well documented reality that individuals personally managing their retirement money in an IRA or defined contribution account do so with lower average annual investment returns and higher costs than when their assets are managed professionally in a pooled defined benefit plan that shares risks and rewards.
Some have pointed out that an individual account can be willed to your heirs when you die.
That is true but when that happens it means you have lost the longevity lottery and died early. I would also note that the survivor benefit available to a member of TRS allows them to provide for their beneficiary after they die.
While not exactly analogous to the passing on of an asset like the remaining balance of an IRA, it is a significant value when a member is planning for the financial security of their loved ones after they die. Others have stated that having control over their assets after a buyout would provide a member some financial flexibility.
True again, but this is flexibility that many if not most of our members would likely not need.
It would also subject the funds to the risk of being diverted to some non-retirement use.
Their TRS benefit is the core element of their retirement security.
They are teachers who have planned their retirement relying on a defined benefit that is designed to replace roughly 75 percent of their full-career, pre-retirement earnings.
This is exactly what most financial planners suggest is prudent.
While they may supplement their defined benefit with personal savings in some manner, they have not earned any Social Security benefits that provide a retirement safety net for most of their friends and neighbors.
They need the security of a regular monthly check that their TRS defined benefit delivers.