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.

 

Teacherspensions.org, a project of Bellweather Education Partners, reviewed the effect of Tier 2 reforms on new teachers. Among its  findings:

    • 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.

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Rick
The worst attribute of these plans for all is the fact that your kids get no inheritance from a pension, it stops when you die, even if you get terminal cancer the first day after you retire. Sure, it’s a big Ponzi scheme now and the taxpayers are getting screwed, and society is shortchanged on long range improvements and resources, and politicians are nickel and diming us by skimming fees into this black hole. By all definition though the plan itself is not good for the next generation. So hopefully market forces will make it die as defined contribution plans can offer a better deal, like inheritance,… Read more »
Jim Palermo

While kids may get no inheritance under a DB plan, the beneficiaries of those plans don’t run out of money, whereas DC participants can. My dad has six aunts and uncles over age 90. A 401k for any of them would not have worked so well, but as we’re seeing now state and local officials have under-contributed to public DB plans by using optimistic mortality and investment return expectations, so many of them will also run out of money

Mike
The Tier II & Tier III accrual rates seem to be incongruent with the unreduced retirement ages. MEABF Tier III accrual rate is 2.4%, and maximum pension is 80% of final average salary. .80 / .024 = 33.33 years of service needed to work to obtain maximum 80% of final average salary. One would think maximum pension would be obtained after 33.33 years of service. Let’s say the worker begins at age 22. 22 + 33.33 = age 55.33 for full retirement. But there is a catch. The Tier III chart lists age 67 as the unreduced retirement age. That’s an additional 11.67 years of service to… Read more »
Andrew Szakmary

Since no one can be compelled to accept a job offering such lousy retirement benefits, it stands to reason that new hires taking these jobs must be compensated in other ways in order to induce them to do so. The logic of economics suggests that the state and the City of Chicago are either now hiring less qualified, less productive workers, or that new hires are now being offered higher salaries or faster promotions to make up for the substandard Tier 2 benefits. Either way, it is doubtful that Tier 2, or some new Tier 3, will really save any money in the long run.

J.A. Herzrent

Younger workers will have to come up with a new verse for Solidarity Forever. http://unionsong.com/u025.html

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