Pensions Tier III: Your future 401K will likely not be protected under Article XIII, Section 5, the pension protection clause of the Illinois Constitution.

Democratic Party Speaker Michael Madigan.

-John Dillon. John Dillon blogs at Pension Vocabulary.

“We can overturn any law we pass within an hour.”

The most significant and everlasting words I received from a legislator concerning pension reform bills and future promises came back in 2011, when my good friend Glen Brown and I met with Representative Elaine Nekritz in Buffalo Grove area to discuss our concerns about the “pension reform” being pressed by Governor Pat Quinn.

Representative Nekritz was thought to be the probable successor to Michael Madigan before her announcement to retire from Illinois politics this year.

Back then, as Tier One retirees, we realized the General Assembly – facing an underfunded pension liability after decades of shirking their payments – was about to move to some draconian diminishment of promises made and benefits constitutionally protected.   The bill – SB1 – was not yet fully baked, but it was on it’s way.

We had an emotional discussion.  One of many more…

We were such idealists.  She smiled when she replied to our question –

“We can overturn any law we pass within an hour.”

On May 8, 2015, the Illinois Supreme Court echoed our hope unanimously.  Article XIII, section 5, stands.  There shall be no diminishment of benefits earned upon the contractual entering of employment as a state employee.

Earlier Tier Two passed quickly by the General Assembly for those hired after January 1, 2011, and without any real objection by the unions, requiring new hires to work toward a defined pension that is capped at a CPI of about $110,000 and without a compounded cost of living adjustment.  With the caps and the lesser benefits, Tier II workers started paying down much of the debt created by the General Assembly and surrendered nearly 9.5% of their salaries for less than 6% of a return in a defined benefit.

Glen Brown wrote in January of 2015:

“If Tier II is left alone, it will accomplish its mission. The $61.6 billon 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” (

And now, Tier II pension reserves are calculated to be at 151% funding.

But now, suddenly,  we have Tier Three.

Remember: “We can overturn any law we pass within an hour.”

According to the IEA, Tier III offers a positive opportunity to “fix” some of the problems with the Tier II design.

Among those problems was an unscored bill Tier II passed which did not meet the Federal requirements for a qualified retirement plan or “safe harbor” limit.

According to IEA’s website, “ SURS and TRS members who first become participants of the pension systems on or after a to-be-determined implementation date (likely no earlier than July 1, 2018) will have the option to:

1) Be in a new hybrid benefit, known as Tier III, or

2) Elect to be part of the current Tier II.”

Elect.  Choose.  Decide to leave the benefits of a promised contractual agreement. This is a form of long-sought-after consideration, wrapped in promises of personal ownership has been part of Cullerton’s olive branch to Rauner and an earlier acceptance by a collective of state workers’ unions.

“Tier III offers a hybrid plan of a partial defined benefit (pension) and a defined contribution plan (401k or etc.).  While none of this is fully formed yet, those Tier II people choosing to go with the irrevocable defined contribution (401K, etc.) will pay minimally 4% of their salary, but see their pension contributions drop from 9 percent to no more than 6.2 percent.

“Also, existing Tier II members will have the option of joining Tier III. The retirement systems shall establish procedures for making these elections which, once made, will be irrevocable. The Tier III plan is a combined defined benefit (DB), often referred to as a pension plan, and defined contribution (DC) plan. Under the DB part, the member’s contribution will be no more than 6.2 percent of salary, but may be less depending upon a system’s determination of the annual normal cost of benefits. The member’s contribution drops from the 9 percent of salary required under Tiers I and II.

Entering finally stage right: the 401K style retirement plan.

In 2011, the Civic Committee of the Commercial Club of Chicago urged the adoption of a 401K program for teachers to replace the pension structure currently in place – SB512.  But 401k’s had their birth in the Reagan era: Congress acted in 1986 (during the Reagan presidency) to replace defined benefit plans for federal workers (CSRS) with a less generous defined benefit plan (FERS) and a generous 401 (k) plan called a TSP.  This explicit endorsement by the government from a single type defined-benefit plan to a possible combination of defined-benefit/contribution plan to which employees could elect to contribute amounts of their own choice became the starting point for a fast growing industry in financial investing and personal portfolios for retirement (Employee Benefit Research Institute, 2005).

Makes you wonder who will be managing these teacher investments, doesn’t it?  Maybe Ken Griffin at Citadel?

Sorry.  Couldn’t resist.

“We can overturn any law we pass within an hour.”

Beginning with the 2020-21 year, all employer costs (normal and any unfunded liability) for a Tier III member will be picked up by the member’s employer and not the state (prior to that date, the state will contribute 2 percent of each Tier III member’s salary to each system with the Tier III member’s employer picking up the rest, if any exists). Under the DC part, the member must minimally contribute 4 percent of salary, while his/her employer must contribute at least 2 percent and could contribute up to 6 percent of salary.

Your future 401K will likely not be protected under Article XIII, Section 5.

 By 2020, the local districts pick up the cost of your 401K savings plan.  The state has no responsibility to engage in any promised compensation for your investments..

I repeat what I warned in 2014:

Note: Always remember this.  Were the State or Rauner ever able to move public workers to a 401k retirement system, it would not be protected under the Pension Clause.  If the State found that matching contributions to a 401k plus the need for Social Security were too much, the General Assembly could do away with 401k plans altogether. 

8 Replies to “Pensions Tier III: Your future 401K will likely not be protected under Article XIII, Section 5, the pension protection clause of the Illinois Constitution.”

  1. …What remains a critical issue is that redistributing the funding burden to the state’s school districts and to their teachers and property taxpayers is unreasonable and unwarranted, and that legislators bear in mind that offering a fair and sustainable pension plan for teachers is a priority, not only for teachers but for the public school districts in Illinois. What is also at stake here is whether “the best and brightest” possible teaching candidates become one of the state’s exigencies. The state will not attract or retain the “best” teaching aspirants without offering an equitable and solvent defined-benefit pension plan for them. Finally, what continues to be most crucial for all of us is that policymakers in Illinois guarantee a minimum level of payment to the public pension systems and pay the unfunded liability, thus, upholding the state’s constitutional obligation while maintaining their legal and moral responsibility (March 7, 2012).

  2. Tiers of a Clown

    Now if there’s a smile on my face
    It’s only there trying to fool the public
    But when it comes down to fooling you
    Now honey that’s quite a different subject

  3. I think this was designed to flop because teir 2 is bailing out t 1. We need to point out that taxpayers really are not. Because of the ramp and actuarial rules they had to raise taxes instead of raid the pension funds. They went on to violate the constitution because t 2 did not give cash now its cash later. Ask Biss he knows math.

  4. What will our illustrious legislators do if Tier III [won’t even mention the debacle with Tier II] doesn’t go as planned, create more tiers? If so, how many tiers will it take to make our pension systems solvent? What will happen when already cash strapped school districts can’t do what is being asked fo them in Tier III? IL public education and educators are up a creek without a paddle in the not too distant future. Unfortunately there won’t be much sympathy in Springfield. Guess that’s why so many legislators look a blind eye when it comes to the growth of charter schools.

  5. Yes, I DO wonder about who will be managing these investments–if not Citadel, some group (Steans?) equally “chosen” by legislators, as in, who gave the most money to re-elect or elect who?
    It’s no joke, people, & those hoodwinked into making that choice better know just who is managing these investments.
    Although they probably won’t know beforehand, so their “choice,” then, should be clear–don’t take the bait, people. Stick with what you’ve got.
    (See, also the PBS documentary “Retirement Gamble,” {hopefully still}available on the PBS website.)

  6. CPS officials estimate 8,000 fewer students will enroll in the schools next school year. District officials gave principals their budgets Thursday but plans to release them publicly were delayed by technical difficulties, CPS officials said. This is the latest school-based budgets have been released to principals in recent memory. In 1972 Chicago had over 500,000….

  7. Btw Is fertility hit a record low so it means shrinking population everywhere . Except for Africa the UN is projecting no growth.
    Also I worry about all these wall street outfits including those who deal with our pension funds. They consider is all unsophisticated.

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