New Workers Subsidizing Illinois’ Surging $100,000/Year Pension Club – WP Original
By: Mark Glennon*
The number of public retirees receiving pensions over $100,000 in Illinois jumped this year to 7,407, up 1,384 since last year. The chart on the right shows the growth in that number since 2012.
The numbers are extracted from the Better Government Association’s pension database. They include only 17 pensions — the statewide pensions and those for Chicago and the Cook County area. They do not include retirees in the 655 pensions for police and firefighters outside of the City of Chicago, for which the same data are not readily available.
Of those 7,407 in the $100,000 club, 5,241 worked less than 35 years to earn that pension. 1,516 worked less than 30 years.
It’s an old story when numbers like that upset private sector taxpayers.
But there’s another group you’d think would be livid, and that’s a whole other story: “Tier 2” workers — those hired after 2010. And it’s not just because their pensions will be far lower than for Tier 1 pensioners (who account for all those in the $100,000 club). They have to pay dearly to help fund the fat Tier 1 pensions, and they may end up with nothing at all.
In 2010 Illinois created a second, junior level of beneficiaries for state and local pensions. Employees hired after 2010 became Tier 2 pension participants with far lower benefits. Tier 1 employees kept the same, more generous benefits they had before. The unfunded liabilities you always read about are owed entirely to Tier 1 employees for work already done.
What’s less known is that those young, Tier 2 employees are forced to pay more than what’s needed to fund their own pensions. They pay an additional subsidy to help reduce the growth of unfunded liabilities owed to their Tier 1 coworkers.
New numbers on that subsidy are in the recently released Preliminary 2015 Actuarial Valuation Report for TRS — the Teachers Retirement System, which is by far Illinois’ largest pension and accounts for about 60% of the state’s unfunded liability. According to that report (P. 21), $6.75 billion will be taken out of Tier 2 employees’ share of pension contributions to go towards the Tier 1 unfunded liability over the coming three decades. Tier 2 workers will pay their own “Normal Cost” (which is the cost of funding just their own pensions) and more: 21% of what they pay in will go to those older workers’ pensions.
A similar situation exists for Tier 2 employees in other Illinois pensions, though I have yet to see hard numbers on them. (It should be noted that, in the case of teachers, many do not in fact pay their entire employee contribution. Many local school districts help pay that.)
Making matters much worse for younger workers, many will never see a dime of pension money because they will change jobs before their pension vests at all. For teachers, a “shockingly high” number will get nothing, which is the conclusion in a new study by Bellweather Eduction Partners. Only 38% of Illinois teachers can be expected to stay on their job for the minimum ten years needed to get any pension. Only 18.5% are projected to work to their full retirement age. They do get back their own money they put in if they leave their job before vesting, but that should be little comfort to anybody rationally planning for retirement.
Illinois is one of only four states that double-whack younger workers this way, by denying them any Social Security or a pension until they work ten years. And, even if they work until their pensions vest, can they really count on anything being there?
That’s crazy. Even one of Illinois’ most radical labor activists, Fred Klonsky, who is hell-bent on defending his Tier 1 pension, has noticed the unfairness in this. (Fred’s basically a Marxist as far as I can tell, and I usually like to annoy him, but he’s right about this one.)
So, what do we have? It’s a system that, on one hand, gives ever more lavish pensions to Tier 1 workers that grow each year thanks to an automatic COLA much higher than market projections on inflation, and unfunded liabilities surging every year with no hope of being paid. (The subsidy paid by Tier 2 employees isn’t nearly enough to control the growth of those unfunded liabilities.)
But for new employees, it’s a system that offers little if any reliable benefit and forces them to help fund the lavish pensions of others.
Public union leadership, comprised of Tier 1 members, certainly will have an interesting problem as the number of Tier 2s grows. By then, the whole Tier 2 system may collapse because it may run afoul of legal requirements for its exemption from Social Security, which we wrote about earlier.
What a sickening mess.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.