When: Tuesday, November 15, 2011 from 7:00pm to 9:00pm

Where: COLLEGE OF DUPAGE
Room SRC 2800
Student Resource Center
425 Fawell Blvd.
Glen Ellyn, IL 60137

AGENDA

• SURS UPDATE
  William Mabe, Executive Director
• INVESTMENT UPDATE
  Dan Allen, Chief Investment Officer
• LEGISLATIVE UPDATE
  Michael Weinstein, Chief Legal Counsel

Audience questions and comments will be welcome.

Everyone is welcome.
Bring your lunch and get caught up on what is happening with our pensions.
See you there!

As you know, the critical issue with the pensions is a history of the state failing to pay its contribution.  The problem is how to deal with the shortage, particularly at this time.  Even with the temporary income tax increase, Illinois is still running a deficit.  In this paper, I want to describe briefly the proposal for the pensions of current employees that was put forward last spring.

Last spring, a bill (HB512) was drafted that would essentially put an end to the current benefit structure by increasing the price so drastically that few of you who are still working would choose to remain in the system.  To remain in the current benefit structure, you would need to contribute over 15% of your salary as compared to 8% now.  In three years, that rate would rise.  Some predict it could eventually reach over 30%.  If you are not very close to retirement, you might find that a little too expensive.

Under HB512, if you choose not to continue in the current system, you would have the option of choosing one of two other plans, the self-managed plan and Tier 2 of SURS.  Both plans require an employee contribution of 8% of salary. New employees hired after January, 2011 were given the choice of one of these two plans.

Under the self-managed plan, the state would contribute its share of your benefit immediately to an account that could be invested in one of the funds provided by the state. Your retirement benefit would depend on the success of the investments.  The retirement age under this option is at least 62 if you have 5 years of service, 55 with 8 years of service, and any age given 30 years of service.  The possible retirement ages and the immediacy of the state’s support make this plan attractive.  The downside of this plan is that there is no guarantee of the benefit that you will receive.  The benefit would depend totally on market forces.

The other plan is called Tier 2 of the traditional plan.  Under this plan, the state contributes its share of your benefit to SURS.  Historically, the state has often failed to make its contribution.  The major changes to the pension in Tier 2 are the following.  First, the retirement age is increased to 67 regardless of years of service.  The penalty for retiring before the age of 67 is 6% of your annuity per year.  Second, the cost of living increase (COLA) is reduced from 3% per year to the lower of 3% or one half the increase in CPI.  Neither amount would keep up with inflation, which is measured by the CPI.  The COLA would no longer be compounded.  Instead each year’s COLA would be calculated based on your initial annuity amount.

The main advantage of Tier 2 is that it provides a guaranteed benefit of 2.2% of average final salary.  The maximum possible annuity, however, is capped at $106,800.  You may consider the latter not to be a problem for you, but we cannot predict the value of $106,800 twenty years from now given that inflation may occur.  My final salary after 35 years in higher education was almost 10 times my initial salary.

There is also another proposal under consideration that affects the pensions.  Senator Michael Madigan has proposed constitutional amendment that would require a plurality of 60% for the legislature to increase pension benefits.  If this amendment were to be approved by the voters of Illinois, it would make it very difficult for a wiser legislature of the future to reconsider the retirement age of 67, the unfairness of the COLA, or raising the maximum annuity.

Jane Wells

Click here to download/view: Sample Legislative Information Sheet (doc)

First, there are more than 196,000 retirees in these five Illinois pension systems, and here are the average annual pension amounts for each:

SURS State University Retirement System … $31,308

TRS Teacher Retirement System … $41,532

SERS State Employee Retirement System … $ 27,012

JRS Judicial Retirement System … $104,208

GARS General Assembly Retirement System … $47,052

Pensions paid to retirees in the above systems who live in Illinois total more than $4 billion.  The economic benefit of those pensions is approximately $6 billion (about $1.50 for each pension dollar).  Pension dollars are a very important part of the Illinois economy, statewide and regionally.

Studies show that pension benefits in Illinois are average or slightly below average relative to other states, and the cost to Illinois is also below average. There have been many attempts to characterize all pensions as “gold plated” by citing the extremes. There are outliers, through law or otherwise, where pensions are eye-catching. However it is a mistake to focus only on these outliers. These outliers do not account for the unfunded liability of the pension systems.

Here are some little known points about these state pension systems:

1. 1. With only a few exceptions in the SERS system, state employees do not pay into or receive Social Security retirement benefits.  Instead, state employees contribute from 8% to 11.5% of their salaries to the pension system.  The employer (the State of Illinois) is required to match that.  A portion of the contribution from employees pays for the future cost of living increases.
2. 2. Unfortunately, over the past 40 years, the lawmakers and governors have repeatedly underfunded the pension systems.  They have used the money that should have gone into the annual funding of pensions for other budget shortfalls.  The employees have continued to contribute, but their money has not been matched as promised.
3. 3. Employees contribute the required percentage on all of their salary (there is no cap), no matter how much they earn.  This is different from Social Security, where employees don’t have to contribute their portion on incomes over$106,800.
4. 4. In the private sector, employers must match the employee contributions to Social Security, and they are not allowed to take a “holiday” from matching.
5. 5. Any state employees who are eligible for Social Security benefits based on prior or other employment receive a much-reduced benefit because of the Social Security offset rule.  Surviving spouses typically receive no Social Security benefit because of such offsets.

There have been many proposals for reform of the pension systems, and indeed the 2005 modifications have eliminated end-of-career salary bumps, which were used in the past to inflate pensions for a small number of people.  Even before the new pension law was passed in 2010, employees in SURS, TRS, and SERS needed to work more than 35 years to reach a maximum pension based on 75 to 80% of their highest four year average.  Lawmakers and judges needed to work only 20 years to collect 85% of their highest salary ever.

The state needs highly educated and competent employees, and although the income potential from government careers is limited, benefit programs have been used to attract talent to jobs that are important.  If the state of Illinois had met its obligations year after year, the crisis in funding that we now face would never have happened.  It is not reasonable that the retirees who gave their years of service and made their contributions should be penalized because of obligations not met.

Addison Woodward

All of that makes sense, until you realize that for the last 30 years the vast middle class has not shared in the wealth created in this country. Private workers have seen their retirement plans scuttled, matching contributions to their 401k diminish or disappear, and employee health insurance benefits cut or costs increased if such a plan is not eliminated altogether. Across the country, 500,000 public sector employees have been laid off, and those still working are faced with reduced pensions and increased health care costs, even though these employees once chose security over the higher wages private employees received. And the media and popular press have fostered conflict between union and non-union workers, between private sector and public sector workers, and even between the young and the old.

The reality is that sacrifice, shouldering the load, pitching in, whatever term one uses, has been one-sided, with the working class doing it all, while the very rich benefit from increased profits provided by workers. It is all about the bottom line. Increase profits by cutting costs. Reduce or eliminate health care, eliminate those costly pensions, lay-off workers, ship jobs overseas, don’t share the profits created by the most productive workers in the world, and reap the benefits provided on the backs of the workers.

Corporate leaders know how to leverage their efforts and get paid in four ways. As profits increase; salary increases, bonuses increase, stock options increase and dividends increase. And by the way, don’t be fooled by the phrase “We must please our stock holders.” In any corporation, the largest individual stockholders are the small cadre of upper echelon leaders.

Also don’t be fooled by the many variants of “trickle down economics.” In 2003, the Bush tax cuts went into effect. The marginal tax rates were reduced for all workers, but the largest cuts were for the highest bracket. The dividend tax was reduced to 15% from being taxed as ordinary income, the capital gains tax was also reduced, and the estate tax exclusion was increased. The very rich profited tremendously from these changes, and the result was a huge recession and staggering unemployment. Those fortunate enough to have jobs have seen the purchasing power of their income erode, and vast numbers of the middle class joined the poor, and the poor became destitute. So enough about shared sacrifice and pitching in to help.

Also beware of pitting older Americans against younger Americans.  If there is a concern about social security, increase the contribution limit to $150,000. If Medicare is going to be stretched too thin, increase the contribution limit. Younger workers need the assurance of these support systems more than ever, since they will not have pension plans, and 401ks will reflect only what they have been able to save on their less-generous salaries. They need to know that health care and social security will available to them when they retire.

Finally whatever happened to the notion of “the greatest good for the greatest number of people?” That, I thought was the guiding principle of government and certainly the Democratic Party. It would seem that had that been the principle during the last decade, this country would be in a much better place than it is today. Instead, it seems the mantra has been “the greatest good for the fewest people.”  That is the choice facing the American people.

Addison Woodward

HB 175 (proposed health insurance premium legislation) and HB 512 (the so-called pension”reform” legislation) will not be called this session. There were not the votes available to pass this legislation at this time. This is an important victory in what promises to be a protracted battle on both these issues. This victory owes much to the  efforts of SUAA.  HB 512 would have increased your pension contribution to over 14% of your salary.

The battle is not over, merely postponed.  If you are not yet a member of SUAA, click here for the membership form to join now.

Mark your calendar for the President’s lunch and annual GSU SUAA meeting on June 30.

www.suaa.org
www.gsusuaa.com

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