Illinois Public Pensions

[youbet]

We've had many discussions on this board concerning the fairness, viability and survivability of various pensions, especially public pensions. I've been following the situation in Illinois where the state budget is in shambles, tax increases are on the drawing board and some people (not necessarily me) consider some aspects of public pensions excessively generous/expensive.

I now see that the Legislature has passed HB1946, sponsored by Rep. Bob Fidler (D) and sent it to the governor's desk for signature. I noticed the bill makes these significant changes:

Raises the full retirement age to 67 or an early, reduced pension at 62, either with 10 yrs service.

Pensions will be calculated on the basis of the final 8 yrs of service, increased from 4 yrs. (This will make spiking more expensive for the various employer agencies.)

No double dipping. (Continuing to work for the gov't while collecting a gov't pension.)

Caps the highest salary a pension can be calculated on at the SS earnings cap.

Only people hired on or after 1 Jan 2011 are affected.

And, amazingly, the legislature also passed HB6368 to make similar reforms to pensions for General Assembly members and judges. That is...... what they did unto others, they also did to themselves!

Will this be isolated to Illinois? Might similar changes occur in other states impacting the future retirements of youngsters entering the state labor forces in the future?


http://news.mywebpal.com/news_tool_v2.cfm?show=localnews&pnpID=469&NewsID=977067&CategoryID=7026&on=1

Mods: I hope this doesn't belong in the political section as it's intended as a continuation of the discussions of DBP's and FIRE. But feel free to move if necessary.

 

[ripper1]

ripper1

Well, I do think that the top 1% is probably excessive, but the remaining 99% is probably in line with private. Don't forget most public employees do not get social security. Illinois has not paid into the pensions for years their portion while the workers have and now you have this big mess.

 

[ziggy29]

Well, I do think that the top 1% is probably excessive, but the remaining 99% is probably in line with private.

Private pensions? They went out with typewriters and carbon paper.

I think pension funds simply need to have reasonable and realistic expectations about return. When you have expectations of 8-9% return -- and promised payouts based on achieving such an aggressive high return -- you need to take a lot of outsized risk which, IMO, are not acceptable for pension funds. You also increase the chance of not reaching your expected returns and asking the taxpayer (most of whom don't have a pension) to pick up the tab (leading to public backlash). Simply making sane assumptions about actuarial details would have gone a long way into making the mess more manageable and maybe temporary.

And I don't really think someone should be collecting a pension in their 40s or early 50s in most cases. Sure, you become eligible for something with 10-20 years of service, even if you leave in your 30s or 40s... but no collecting until *at least* 55 and preferably 62. The "3% at 50" plans (where you can often collect 90% of pay, often COLA'd, for life starting at 50) are particularly budget-busting.

Spiking is an abomination and it should be banned completely, not just diminished with the 8-year average rule. Still, that's a positive change, though I'd have no problem with keeping it at 4 years IF spiking were banned.

And finally, there was always the attitude that we can keep it afloat for a few more years and it won't blow up until I'm no longer in office or in charge of the pension fund... eventually the bomb will go off, and they are going off all across the fruited plain.

But having said that, for most positions (especially those with private sector equivalents) I think new hires should go to a 401K with employer match like everyone else. I'd sooner give someone a raise now (if need be for parity) than create more unknowable and potentially devastating unfunded liabilities decades down the road for our grandkids to clean up.

Simply put, public employee labor costs can't keep going up faster than the wages of the private sector, as the taxes from the latter are what fund the former. The rising "tide" for the public sector can't keep rising faster than the tide for the private sector.

 

[ERD50]

Future 'promises' really cause problems, in both the private and public sector.

At a minimum, there should be strict, very conservative pay-as-you-go funding for any future promises. Better yet, IMO, would be to have no 'promises' at all. It makes it impossible to really compare the 'total compensation' package of one job to another, because we really can't practically assign a present value to these promises. So that messes up a free market for jobs/labor. I'd rather see totally portable benefit plans, privatized, but with 'safety nets' in place for people who fall through the cracks.

So this would affect future employees only - I wonder how much that helps the current deficit in IL due to current pension under-funding? But better late than never, and modifying current promises is political suicide. But then again, raising taxes on the rest of the citizens to pay what many perceive (whether justified or not) to be plush pensions, isn't a popular idea anyhow. As you know, this underfunding is a decades long problem.

If these cuts mean they have trouble filling the jobs (unlikely, given the current unemployment rates), then they need to raise salaries to attract the talent. Much better IMO, as that is a real-time and more transparent expense. I don't have an opinion as to whether these cuts are too harsh, too light, or just right - I'd like to see the market decide that.


Of course, this is IL - it could just be grandstanding if they 'know' the Governor won't sign it, and if they don't have veto over-ride support (hey, we *tried* to fix the problem!).

-ERD50

 

[ziggy29]

Future 'promises' really cause problems, in both the private and public sector.

And it's not just pensions. There was some recent problems here in Texas with the prepaid tuition idea -- another "unknown future liability" program. These types of "pay now for promises later" plans are popular with people, but a terrible idea for governments to create. They almost always underestimate future benefit costs and the programs go insolvent.

Basically -- surprise, surprise -- tuitions were rising faster than the invested values of the prepaid tuition, causing the state to trigger refunds to back out as many promises as they could -- and change the deal for the future.

I don't know that I can recall a "pay now for future benefits" plan that didn't wind up getting ugly when costs rose faster and more dramatically than expected -- even as the revenues and ROI can't keep up.

 

[youbet]

Of course, this is IL - it could just be grandstanding if they 'know' the Governor won't sign it, and if they don't have veto over-ride support (hey, we *tried* to fix the problem!).

Hey, let's not pick on Illinois!

But you're right, there is an issue of the gov's sig. The bill was sponsored by a Dem and we have a Dem gov so I was kind of assuming it would be signed. I suppose there is room for shananigans. But usually when they pull off some legislative strong-arming to convince the public we need a hefty tax increase, it's obviously a scam. You know, like the time they were going to cut the state police and most state funded services if they didn't get the increase....... The stuff in this bill is actually pretty practical. Zero immediate impact on anyone. If hiring did become an issue on down the road, salaries could just be raised to the point of attracting candidates despite the reduced level of pension sweetness.

I'm betting it gets signed.

Edit: Note, they aren't reducing pensions for rank and file future annuitants. It raises the FR age to the same as SS and since the folks impacted aren't even hired yet, the first to be impacted will be many years down the road. They do limit the salary that pensions can be calculated on to the SS contribution max, currently about $106k. That's not going to bother many everyday employees such as teachers, etc.

 

[ziggy29]

But you're right, there is an issue of the gov's sig. The bill was sponsored by a Dem and we have a Dem gov so I was kind of assuming it would be signed. I suppose there is room for shananigans. But usually when they pull off some legislative strong-arming to convince the public we need a hefty tax increase, it's obviously a scam. You know, like the time they were going to cut the state police and most state funded services if they didn't get the increase....... The stuff in this bill is actually pretty practical. Zero immediate impact on anyone. If hiring did become an issue on down the road, salaries could just be raised to the point of attracting candidates despite the reduced level of pension sweetness.

As far as pension reform goes, the stuff that only impacts future new hires is the low-hanging fruit. No one's ox is currently gored and no one can say they retroactively had promises taken away from them.

 

[ERD50]

And it's not just pensions. There was some recent problems here in Texas with the prepaid tuition idea -- another "unknown future liability" program. ...

Basically -- surprise, surprise -- tuitions were rising faster than the invested values of the prepaid tuition, ...

Yes, another great example. Boy, if I could get another economic 'do-over', it would be to have invested in that plan in IL. But at the time I figured, 'who knows', plus a fear that they could change the rules, or I'd fall into some kind of fine-print exclusion.

Hmm, if this 'works' in favor of the municipality, then they 'takers' would have been better off w/o. It is essentially a zero-sum game. In the case of tuition, I guess you just have to look at it as a 'subsidy' - we will make going to college easier for you by freezing costs. But yes, they need to be able to fund it, and as you say, that just adds unkowns to the budget.

Hey, let's not pick on Illinois!

...

I'm betting it gets signed.

Depends if our Gov stays out of jail between then and now. Our Governors have a problem in that area!

-ERD50

 

[youbet]

Trying to keep this thread on FIRE and FIRE related subjects.......

So what's a new hire "ordinary" state employee to do now to get on the road to FIRE? The formula pension amount will be approximately the same, only the FR age is increased to 67, same as SS, with early, reduced pension at 62. Spiking is probably history, but folks should have never been counting on that anyway. Plus 403b's will continue and they work about the same as a 401k but without the possibility of matching. And there are IRA's. It seems like the tools are still there for "average" workers.

Folks from the "high priced spread" group may need to rethink things. With the salary level used to calculate pensions capped at the max SS contribution level (currently $106k) they will have half or less of their salary included in their pension calculation. There's not many of them, but they will need a different plan. Of course, this is all far, far in the future. You're talking about School Dist Superintendents and University Dept Heads, etc. that are probably still in high school or college today.

I'm curious to see whether other states will be looking at this reform as a model. If it could happen in Illinois, it could happen almost anyplace.

 

[stevelb]

Bill will be signed as Illinois HAD to do this to keep its current bond rating as it goes into the bond market very soon for about a billion worth of new debt.

Age 67 does seem a little harsh on teachers, but otherwise a small first step...with many more needed for Illinois.

A little off forum topic..so enough said.

 

[ripper1]

I don't think anybody gets 90%. If people leave after 10 or 20 years they only get what they paid in which would be pretty small. It's rare but there are people who start at age 17 and can retire at age 50 and 33and a half years and get 80% max. Also cola starts after the 3rd year of retirement.

 

[ziggy29]

I don't think anybody gets 90%. If people leave after 10 or 20 years they only get what they paid in which would be pretty small. It's rare but there are people who start at age 17 and can retire at age 50 and 33and a half years and get 80% max. Also cola starts after the 3rd year of retirement.

I was speaking of troubled pension plans in general, not really anything specific to Illinois.

There's no question in my mind that younger generations are definitely not inheriting "the deal" or the economy that their parents and grandparents got for most of their lives. At some point I think there will no longer be any *expectation* of a long, comfortable middle class retirement unless it involves being in an extended family living arrangement. We're already creeping toward that now.

 

[ripper1]

ripper1

I agree. There is going to be a lot of multi generational people living together. This will probably be the first generation that does not do as well as the last.

 

[ESRwannabe]

I am 33 and work for a state government doing IT work (server/network administration). I am vested into the state pension system but I am increasingly thinking it is not going to be worth much when I can begin to collect (age 60). It is beginning to look a lot like social security, which I assume I will pay into my whole life and then ultimately receive nothing back from it.

I am under-paid about 20% compared to similar jobs in private industry in my location. I have been ok with that because of the pension and job security. The job security is still great but the pension is giving me serious doubts, due to the public opinion I see, anytime I read about the subject. It seems that most in private industry can't wait to tear up our pension agreement and simply renege on the whole thing.

At my employer the majority of my co-workers are baby boomers that are eagerly looking forward to getting the hell out. So, I would say that if they start messing with the pension here they will shoot themselves in the foot. Most of the workers will simply retire asap as to be grandfathered in to the old setup. The younger workers like myself will likewise leave as there would be little benefit to staying.

 

[haha]

The younger workers like myself will likewise leave as there would be little benefit to staying.

Have you noticed how quick the lights go out in government buildings at the end of the day? Have you noticed how many industry programmers essentially work all the time?

If you are very sharp and very, very hard working, it may be worth it for the chance at the gold ring. Otherwise, perhaps not.

Ha

 

[kumquat]

For those of you who worry about DC pensions, here's my story. My first real job (as in post degree) was for a Canadian government organization, started in 1973. We had a DB pension. About 1974, it was converted to DC. Even though I went through the stagflation of the 70's, Black Monday of 1987, the tech meltdown etc. My DC balance is about C$1.3M today. At one time (during the tech bubble, I think) I made a spreadsheet that projected the previous 25 year's earnings out to age 65. If it had come true, at 65 (five years from now) my DC plan would have about $14M. That would have been the mother-load, but what I got wasn't bad. Add some savings, some luck (mega-corp options) and I'm better off than 99% of my friends.

I may be lucky in that I RE'd in 07 and haven't touched the pension money yet, but 4% of 1.3M is still > 50Kor about 50% of ending income. If I had a DB pension (here in Canada) by law it is limited to 70%. When I retired, if I had still been under the original DB plan, my pension would have been 1.5% * 33 years * final pay (110K) = $55K.

If I had a DB plan from Air Canada, Nortel or a million other [-]Canadian[/-] companies, I'd be screwed. DC can't be that bad and you get some control (I hope).

 

[ESRwannabe]

Have you noticed how quick the lights go out in government buildings at the end of the day? Have you noticed how many industry programmers essentially work all the time?

If you are very sharp and very, very hard working, it may be worth it for the chance at the gold ring. Otherwise, perhaps not.

Ha

It is the same everywhere in IT.

I am on-call 365 days of the year. Last weekend I got called in Sunday night and spent 3 hours fixing a problem at work. Usually once or twice a month I will get called in outside of normal work hours. I have been called in during holidays and vacations.

Next week I am scheduled to come back into work M-W from 7pm to 11pm, after working my normal day. So I can take care of some things I can't do during the day because of the down time. This is typical.

I have worked in both private and public doing this work and it is the same everywhere. It is the nature of the job.

 

[tinlizzy]

Age 67 does seem a little harsh on teachers, but otherwise a small first step...with many more needed for Illinois.

Harsh also on road crews, troopers, and penitentiary employees. 67 is just too old for dangerous or heavy physical labor. Pensions might end up being replaced by work comp settlements for these folks.

 

[samclem]

Here's how compensation (including pensions and other benefits) compares between state/local govt workers and private sector.

Obviously, this paints with a very broad brush and doesn't take into account the relative levels of education or experience in both pools.

Secondary source

 

[clifp]

Harsh also on road crews, troopers, and penitentiary employees. 67 is just too old for dangerous or heavy physical labor. Pensions might end up being replaced by work comp settlements for these folks.

Generally 1st responders receive a separate pension plan that allows them to retire in their 50s after say 25-30 years in the job. I suspect those aren't affected.

As for too old perhaps, although I know many 67-80 years years old that paddle between the island (about 8-10 hours), take week long horseback rides, complete 1/2 Ironmans, bike 100 miles etc. By comparison running a backhoe, or checking on prisoners doesn't see that demanding.

There are also plenty of 60+ year old employed by private industry on physically demanding jobs that don't get the option to retire in the 50s with 80% pay.

As a society we can't afford to let people work for 40 years and than collect 20 years of pensions, not without requiring them to significantly increase their savings into the 30% range (Social Security is 15%)

 

[ripper1]

ripper1

All I know is I worked hard as a laborer and then a plumber for the City of Chicago for 30 years. It was hot in the summer and sometimes very brutal in the winter. I will be 55 this summer when I retire. Based on a formula of years (30) and 2.4 I will get 72% of final average salary of my last 4 years. While I'll agree the money is decent I will also contribute 700 a month to my health insurance. The city is also telling us they will no longer contribute to health plan after 2013.

 

[ERD50]

I will be 55 this summer when I retire. Based on a formula of years (30) and 2.4 I will get 72% of final average salary of my last 4 years.

Question - do you start receiving that 72% at 55, or is that the age 65 amount and reduced at 55?

While I'll agree the money is decent I will also contribute 700 a month to my health insurance.

Just for reference, many private company retirees are paying more than that for their HI. Those people wouldn't consider that an offset to your pension, but another benefit.

And none of that is meant to question whether you 'earned' or 'deserve' it or anything like that - I'm in no position to question that. Just trying to understand what those numbers mean, since you put them out there.

-ERD50

 

[kyounge1956]

(snip)As a society we can't afford to let people work for 40 years and than collect 20 years of pensions, not without requiring them to significantly increase their savings into the 30% range (Social Security is 15%)

So, I shouldn't be able to retire when my pension and other sources of income are enough to cover my expenses, but rather when I have satisfied some arbitrary savings requirement? What exactly are you suggesting?

 

[chinaco]

The pension crisis that is looming large and has been studied by numerous government and financial organizations world-wide.

Much of the issue is with public pensions that were too generous. I doubt that government orient pensions will default. It will be dealt with through a variety of tax increases on the general public. I suspect that there will wind up being a progressive tax on pensioners that have an AGI over a certain amount. This is how the SS problem will be dealt with also.

Local, State, and Fed government organizations are reducing the benefits and terms for future retirees... because they are feeling the pinch.

 

[clifp]

So, I shouldn't be able to retire when my pension and other sources of income are enough to cover my expenses, but rather when I have satisfied some arbitrary savings requirement? What exactly are you suggesting?

No not at all.

I am suggesting that all future pension private and public be structured that you need to work 45 year from roughly 22 to 67 in order to retire without a significant reduction in your lifestyle say 90% of your take home pay. Assuming you are doing no other saving (i.e. the 47% of American that have under 10K saved for retirement).

If you are willing to accept a reduction in pension like we see in Social security between 62 and 67 than working 40 years is an option, meaning you collect ~20 year of pensions.

Right now most local, state, a few union pension systems, along with police, fire, and military are designed to provide basically full income after 25-30 years.
This was probably ok when folks didn't live much past 70, but we as a society can't afford it now. There should be some compensation for dangerous and demanding jobs e.g. Fire, military to allow an earlier retirement. But even for them retiring simply on their pension without saving at ~50 years is too generous IMO. Since a person is likely to collect 30 years of pension.

A simple way of looking at this retiring after working 45 years at 67 and collecting 15 years of pension means 3 workers for every retiree.
At 62 it is 2 workers per retiree
At 52 is is 1 worker per retiree.
American worker productivity compared to the rest of the world no longer supports such a system.

Note this doesn't apply to most members of the this board, because we have have LBYM for many years and are prodigious savers. We've traded a lower lifestyle for longer retirement. If you have other source of income, because of saving, side business, rental whatever, than you can retire whenever you want.