Pension reform and the 401(k) defined contribution rip-off.

President of the Chicago Teachers Pension Fund, Jay Rehak (left) and pension blogger John Dillon (right) on Hitting Left with the Klonsky Brothers. Podcast #27.

“No issue in America today better illustrates the divergent interests of working Americans and the 1 percent than pension reform,” writes David Webber in an op-ed piece in yesterday’s New York Times.

Advocates of pension “reform” — which really means cutting or eliminating traditional pension funds — will tell you that such funds are a big drain on state and local budgets, since, as defined-benefit programs, they are obligated to pay workers a defined amount in their retirement. But that’s largely a question of political priorities; underfunded pensions are the result of, well, decades of underfunding pensions. The real reason for the attack on pensions goes deeper, and exposes the great and growing rift between America’s economic elite and everyone else.

Consider how we 401(k) holders behave as investors. How many of us thought to sue Wells Fargo after the Consumer Financial Protection Bureau revealed that the bank had created millions of fake credit card and bank accounts? Or to push our fund managers to do so for us? How many of us call up our fund managers after a quarter, a year or a decade in which we underperformed the Standard & Poor’s 500-stock index to renegotiate our fees? Or even to switch managers? How many of us even know how our funds performed relative to the S.&P. 500?

The answer to all of these questions is a number very close to zero. We 401(k) holders are the world’s ideal source of capital. We let ourselves be charged high fees that we do not understand, we accept poor returns quarter after quarter, we never sue to enforce our rights, we never vote as shareholders and we never tell our investment managers how we think they ought to vote. We are beyond passive; we are supine.

At bottom, the problem is structural. We are to our investees and investment managers what nonunionized, “right to work” workers are to their employers: alone and devoid of leverage to negotiate. That stands in sharp contrast to traditional pensions, which, like unions, are collective and centrally managed.

Illinois has been one of the many playing fields where the attack on defined benefit public pensions is being played out.

While the Illinois Supreme Court has ruled that any attack on current retirees cannot be changed, impaired or diminished, teachers hired after January 1st, 2011 are in a Tier II system.

The Tier II employees are so screwed that they will never earn back in retirement what they are paying into the system. It is quite likely that at some point in the future the state will be on the hook for failing to meet what the federal government calls safe-harbor. Tier II retirees covered under TRS will not receive what they would have received if they were covered by Social Security.

Last year the legislature acted, claiming their intent was to fix Tier II by creating a third tier.

Tier III is the foot in the door for turning the entire public pension system into a 401(k) defined contribution plan.

Last July I posted:

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.

David Weber brings up an important point. A defined contribution system turns every future and current pensioner into an individual investor rather than a member of a large interest group.

Politically, this is suicide when compared to the power of the 1%.


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