I've written before about how bad Illinois' pension plan is for new teachers. But you don't have to take my word for it. Read Dick Ingram, the Executive Director of the Teachers' Retirement System (TRS) of the State of Illinois, explaining in his own words how teachers hired after January 2011 (enrolled in a pension plan called "Tier II") lose out to all those who came before (those who participate in a more generous plan called "Tier I"). It's quite remarkable for its candor:
Tier II is designed to help solve the financial problems faced by TRS and the other systems by reducing pension benefits for these new members. Lower pensions means reduced long-term costs for the state.
If Tier II is left alone, it will accomplish its mission. The $61.6 billion 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.
Like other Tier II members, I’m happy to help out, but 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. I like all of you very much, but this is a matter of equity for Tier II members.
And someday this subsidy may be declared unconstitutional, which threatens the revenue stream that is designed to eliminate the System’s unfunded liability. We may see a scenario where Tier II members argue in court that the subsidy we pay is really an extra income tax – a tax that only we have to pay. That would be unconstitutional.
Hat tip to Mark Glennon at WirePoints. Read the full text of Ingram's letter here.
(Update: As a reader pointed out, Ingram's future projections assume all the state's actuarial assumptions are correct, investments return a compound interest rate of 8 percent, and the state upholds its funding commitments. If those assumptions prove incorrect, the state may be forced to create a new, even worse plan or raise contribution rates further.)