Keeping retirement weird. Chipping away at public pensions: A Tier III.

 

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Candidate for Governor Ameya Pawar told us he is against any diminishment of public employee pensions.

At about the 37 minute point of our talk on Hitting Left with the Klonsky Brothers with Alderman and Democratic candidate for governor of Illinois, Ameya Pawar, and following an extended conversation about public employee pensions, I asked, “If the legislature passed a bill changing the benefit structure of the pension system, diminishing benefits, would you sign it?”

“No, I wouldn’t,” Alderman Pawar said. “Because they keep playing the same game over and over again.”

I was prescient.

Only a few hours earlier, the legislature overrode a veto by Governor Rauner, of a budget agreement.

That was good.

But part of the budget agreement was a change to the pension system that few of us knew was in the agreement.

This is bad news.

Late yesterday I received this notice from the Illinois Teachers Retirement System:

In conjunction with this week’s passage of a state budget for fiscal year 2018, the Illinois General Assembly approved a new law that significantly changes the Illinois Pension Code by creating an optional “Tier III” benefit structure and changing the way state government funds TRS.

A Tier III?

Let me explain that in 2010, Speaker Madigan pushed through the legislature in 12 hours a Tier II to public pensions that meant that for those hired after January 1, 2011 workers would need to work longer, pay less into the system and receive 60% of the pension that Tier I employees receive.

  • The law gives current Tier II members and future Tier II members – all new teachers – the option of joining a new “Tier III” retirement plan.

  • The optional Tier III “hybrid” retirement plan has two parts – a small life-long “defined benefit” (DB) pension and a “defined contribution” (DC) plan similar to a 401(k).

The change does not impact current retirees or Tier I members.

How is it a diminishment? 

Because a defined contribution system is a stock market gamble compared to our current defined benefit system, which like Social Security, guarantees a planned financial retirement.

For the time being it is a choice option for Tier II and the new Tier III employee.

But don’t miss the game plan. This is another slow chipping away at the defined benefit system and further undermines the financial stability of TRS by drawing member contributions out of the system.

By the way, none of the legislators I am in touch with notified us that this was in the bill.

Did they know? Did they read what they were voting on?

Could those of us who have been in the pension fight for years have mobilized folks to oppose including this Rauner agenda item while still supporting passage of the budget, a tax incease and an override if we knew about this?

I did read that the budget agreement included $1.5 billion in savings from pension reform and wondered where these “savings” were coming from.

Savings without added revenue means a cost to the retirement system. A cost to future retirees.

Now we know.

What else is in the budget bill that we don’t know about yet?

14 Replies to “Keeping retirement weird. Chipping away at public pensions: A Tier III.”

  1. Where was ald. Pawar when Rahm cut C.O.L.A s in 2014 for theLABF &municipal funds.Only pro bono lawyer Clint Krislove overturned cuts in circuit & Il. Supreme Court.I did’nt hear Pawar’s press conference condeming Rahm’s cuts.Oh, there was no press conference

    1. You are absolutely right. And as the alderman said on our show, there is no substantive difference between any of the Democratic candidates.

  2. There isn’t much difference so let’s go with the rich one because the dems thenvdont have to spend money. Ads against trump can help races in nearby states as well. Democrats need another Senate seat and a few house seats plus there could be 3 to 4 us house seat flips. A big adversting campaign in Illinois could help Senate Gov and even a house seat in our surronding states of Iowa ,Missouri and Indiana.Its cynical but I must admit smart for a change. As to Teir 3 it’s probably legal because you can stay in teir 2. They are just hoping some people will make a bad decision. That is state law. It sure can’t be equivalent or better than social security because teir 2 is no adequate so I can’t see how teir 3 would be. There is also a cost shift in the bill on teir 3 And a cost shift for anyone making more than the gov. I assume that is 177000 and not 1. Then there is sb 1 in there too.

  3. No. They. Don’t. Read. What’s.in.the.Bills. Generally, aides read portions & disseminate the info. back. You know, something on the order of a study group in college (a visual example can be viewed in the ’70s film about law school–“The Paper Chase,” where the main character ends up throwing all of his study notes out the window (something like the tantrum Mike Bost had in the House Chambers a few years back–you can still see it—it went viral).
    Just like they were given the unconstitutional pension killer bill, SB 1, the night before (500 pages, more or less-?), & voted on it the next day.
    Have most of you actually read some of these bills…or even a synopsis?
    They tie items that have nothing to do w/the original bill (such as the legislation they just snuck in–both Houses passed–granting AT & T (powerful lobbyists) permission to eliminate landlines. I’ll have to look that up, yet again, & will post the original title, intent of the bill here.
    If I can find it, I’ll post the info. later.
    OR–the evolution of this year’s SB 1 is a great example–just like a rolling stone (no offense to Mick & the guys, or to Dylan), the bill picked up more & more ugliness–500 pps. to begin with, a 482 page amendment was added last minute, on the May 29th Memorial Day holiday (so, seriously, this was read w/a fine-tooth comb-?) which eliminates approx. 25 great programs for IL kids (not to mention the earlier removal of $9000 dedicated sp.ed. funding).
    By all means, Anonymous (& everyone else reading this)–ask away!

  4. Note also the lesser amount TRS can expect to receive from the state in conjunction with this “new” plan. And the cost shift placed on those districts who have employees earning above the statutory governor’s salary ($155,600). This will not affect many now in Illinois where the average teacher salary is in the $60’s, but given a short time, superintendents and stipend positions will become burdens for the more financially secure districts.

  5. The law gives current Tier II members and future Tier II members – all new teachers – the option of joining a new “Tier III” retirement plan.
    The optional Tier III “hybrid” retirement plan has two parts – a small life-long “defined benefit” (DB) pension and a “defined contribution” (DC) plan similar to a 401(k).
    It is unknown at this time when Tier III will be available to members. Before Tier III can be implemented, the plan must be reviewed and approved by the U.S. Internal Revenue Service. It is unknown how long that process may take. The TRS Board will establish the final implementation date of the Tier III plan.
    For Tier III members, the full retirement age will be 67 years and the automatic annual increase (AAI) is the same as the Tier II AAI – one-half of the previous year’s consumer price index, not compounded.
    The calculation for an initial pension under Tier III is Service Years multiplied by Final Average Salary multiplied by 1.25 percent. The Tier I and Tier II pension calculation is Service Years multiplied by FAS multiplied by 2.2 percent.
    This is from the TRS email…read it!!! age 67, NO compounding , consumer price index…key words to look at people..

  6. Most likely Tier II and certainly Tier III will not meet the “Safe Harbor” rule of the Social Security Administration and these employees will need to ALSO pay into Social Security along with their employer.
    ==================================================
    From the TRS Website
    https://trs.illinois.gov/press/reform.htm#dbvdc

    Enrollment in a DC Plan Could Lead to Enrollment in Social Security
    •TRS members currently are not enrolled in Social Security and do not pay the federal FICA tax because TRS retirement benefits equal or exceed the minimum “safe harbor” benefit floor set by the Social Security Administration. (TRS Study – 2010) ◦TRS members automatically would be enrolled in Social Security if the minimum TRS benefit fails to meet the “safe harbor” limit. TRS members would then have to pay half of the 12.4 percent FICA payroll tax, or 6.2 percent. School districts would have to pay the other half.

    •Because the size and distribution of retirement benefits from DC plans are dependent on decisions made by each member, there is no standard retirement benefit to measure against the “safe harbor” limit, so it is likely that the Social Security Administration would enroll all DC plan members and require teachers and school districts to pay the FICA tax.
    •The reportable earnings of TRS members in fiscal year 2014 were $9.3 billion, so total FICA taxes paid would have been approximately $1.25 billion. School districts would have been responsible for $625.5 million of that tax payment.

    1. When I first received the news of the Tier III plan in this budget agreement, the “safe harbor” rule was the first thing that popped into my head beyond the initial anger. Teachers and other public employees under Tier III would have to join Social Security because of the meager returns from 401ks. It’s been a while since I’ve seen the projected costs to our school districts and the State of Illinois even beyond the FICA tax to enroll their employees in Social Security, but they were substantial. Those costs would only add more financial stress to already cash-strapped school districts and to the State’s gargantuan “unfunded liability.” Illinois finally has a budget! Great! But the Tier III plan will only cause harm to future state retirees, school districts, and will do nothing to slow the continued growth of the “unfunded liability.” Brilliant, Mike Madigan! Brilliant, John Cullerton! Brilliant, all you state legislators of both parties who willfully created and supported this monstrosity!

  7. The school districts and universities as I read it will pay the DC match. There was also a small wage increase and more for health care for the homecare workers represented by SEIU. Rauner was trying to get rid of their healthcare. Looks like the GA settled that negotiation. Rauner was trying to cut retiree health benefits and state worker and university worker benefits. It seems those are funded.

  8. Which legislators received 30 pieces of silver for this? Of course the end game planned is to “undermine[s] the financial stability of TRS by drawing member contributions out of the system.” Then the powers that be can appoint an “emergency manager” to cut the legs out from under retirees as well as active teachers. “The Shock Doctrine” by Naomi Klein and “Retirement Heist” by Ellen Schultz explained the plan of attack.

  9. Here is an interesting view point as to what is possibly contributing to the financial problems here in Illinois.

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