By: Mark Glennon*
Pension excess in Illinois is widely reported — and accurate. Less known is that, for many at the bottom, the story is quite opposite. Many new workers won’t get an adequate retirement benefit unless they work a full career in the system, or at least until vesting in ten years. The new proposal for MEABF, Chicago’s municipal pension, would make those workers still worse off, robbing them of meaningful retirement benefits for what may be a large part of their career.
First, some background on the current situation for new hires. For almost all state and local pensions in Illinois, including MEABF, workers hired after 2010 became Tier 2 pensioners. Their benefits were cut substantially and their personal contributions were increased. The unfairness falls primarily on those who retire before age 67 or who work less than ten years in the system.
Let’s look at TRS, the Illinois teachers’ pension, to illustrate. It represents about 60% of the state’s unfunded pension liability, so it has been the most studied.
- A teacher in Tier 2 must serve at least 26 years in order to “break even” and earn a pension worth more than her own contributions.
- Only 38% reach the minimum vesting requirement of 10 years.
- Only 18.5% reach the full retirement age of 67.
Adding insult to injury, Tier 2 teachers are forced to pay extra to subsidize older, Tier 1 members who get far more generous benefits. They’ll pay $6.75 billion towards the Tier 1 unfunded liability over the coming three decades. Twenty one percent of their personal contributions will go to those older workers’ pensions.
Even the Executive Director of TRS, a Tier 2 member himself, complained about that. He wrote, “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.”
Turning to the new MEABF proposal, a new Tier 3 would be created. At the bottom of this article is a chart summarizing the proposal circulated to alderman by the city. It’s actually a mixed bag for those who stick it out for the long term — you can see there are some things better and some worse in the chart.
But the problem is for somebody who works a shorter term. Work less than ten years and you get your own contributions back plus a little interest (the exact amount of which I can’t find for any pension). And it comes back taxable to the worker. That means the worker will have done nothing for his retirement for up to ten years, with either his own money or the employer’s That’s disastrous for retirement planning.
And, worse, the workers’ own contributions would increase under Tier 3 from 8.5% (for Tiers 1 and 2) of salary to 11.5%. That’s stiff. And Tier 1 gets far better benefits.
As for those who do stick it out for the long term, the benefits may or may not be reasonable, depending on your viewpoint, but can anybody really count on much being there? MEABF’s most recent actuarial report says its assets have a market value of $4.7 billion. But its liabilities for work already performed are over three times that — $14.7 billion.
To make up for that shortfall you’d have to believe that the city and taxpayers will be able to honor the new ramp up in contributions, which we explained recently makes the Edgar Ramp look like Kansas.
The Tier 2 “reform” has been a disaster for new workers, as we’ve discussed often before. It was was “bulldozed” through by Michael Madigan and John Cullerton in less than 12 hours, according to Democratic strategist David Ormsby. Nobody really understood it. The General Assembly has a task force supposedly trying to fix it, but they’ve done nothing. Looks like we’re on our way to extending the Tier 2 mistakes, not fixing them, at least for MEABF.
Today, we all know job changing is frequent. Anybody considering public service in Illinois today has to be wondering what they can really expect to get in retirement, and whether their contributions will just end up going towards the massive unfunded liabilities already owed.
JFK’s line for new Illinois public workers, as we wrote before, should be, “Ask not about your retirement benefits.”
Mark Glennon is founder of WirePoints. Opinions expressed are his own.