Illinois Public Pensions

[donheff]

So what's a new hire "ordinary" state employee to do now to get on the road to FIRE?

It seems to me that the possibility of a painless ER was one of the selling points of public employment in years past. It certainly was a factor for me. You made a trade-off with theoretically lower current income for a generous, early retirement. In the future that won't be an available trade off so it won't be a factor in the employment decision. Most public employers have moved to SS and some sort of reduced DBP. Their employees will save like most of us and will take delayed or reduced DBP coupled with SS and savings.

 

[ziggy29]

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

One thing I've noticed is that some public employee occupations are relatively undercompensated compared to the private sector. Science, engineering, IT, medicine come to mind right off the bat. They remain undercompensated even after factoring in benefits including retirement.

One thing that's harder to do is "normalize" the statistics for job demands, hours worked and that sort of thing. I could be wrong but I suspect the fear of layoffs in the private sector leads people to feel like they have to demonstrate their worth by working insane hours.

In any event I don't think it needs to be couched as public sector versus private sector, but we do need to get public sector employment costs in line with wage growth in the private sector, because it's not sustainable for public costs to rise faster than the private sector can support them with taxes. Public sector wages and benefits have been rising faster than in the private sector for over a decade now, and it's reaching the breaking point in this economy. There's only so much you can ask people who have had falling real wages, dropped pension plans, suspended 401K matches and bouts of unemployment to accept higher taxes to secure someone else's retirement when their own retirement is becoming more and more tenuous.

Having said all that, if a public sector job pays 20% less than in the private sector, I'd sooner give a 10-20% raise and a 401K to new hires than their current salary and a DB pension with retiree health insurance. At least we have fixed costs that are knowable that way. Given the value of job security I don't know that compensation needs to be *equal* to the private sector (certainly there's some "value" to increased security), but it can be made closer when folks in the private sector are earning a lot more.

And while I'm not specifically advocating it, I see "retirement security reform" coming down the road in 5-10 years or so as it becomes increasingly obvious that many of the boomers won't have the means to retire even at age 70 without pensions or much personal savings. (Not looking for a political discussion, but I see this building as a "crisis" in the making.)

 

[Bimmerbill]

I'm in IT and I used to check the State of NH IT jobs quite frequently. They didn't pay well at all, but the pension was pretty good. But 4 or 5 years ago they changed how things were done, increased the minimum retirement age, required more years to full pension, etc.

I concluded it wasn't worth even considering an IT job for the state anymore.

With this economy, I'm sure they have no openings. I wonder how many will jump ship once the economy improves?

 

[samclem]

Having said all that, if a public sector job pays 20% less than in the private sector, I'd sooner give a 10-20% raise and a 401K to new hires than their current salary and a DB pension with retiree health insurance. At least we have fixed costs that are knowable that way. Given the value of job security I don't know that compensation needs to be *equal* to the private sector (certainly there's some "value" to increased security), but it can be made closer when folks in the private sector are earning a lot more.

Also, we need to be mindful of the kind of workforce we want in government jobs. There's real benefit to having folks with a lot of experience and who have a vested interest in the success (and, yes, stability) of long-term public programs. Most mature democracies have benefited strongly by having a competent, stable, staid group of civil servants. A hard-charging Type-A person who wants to see quick improvements, wants to rapidly move up the ladder, and is willing to jump to a new company when the opportunity arises is not necessarily going to be the right fit for government work. Having folks jump constantly between govt and private sector employment can cause some ethical challenges that erode public confidence in government.
DB plan have been appropriate for fostering the type of culture needed in a government workforce. Maybe now they've gotten too expensive and we should be looking toward DC plans with long-term vesting or matches that accelerate in later years in order to encourage folks to stay.

 

[ziggy29]

DB plan have been appropriate for fostering the type of culture needed in a government workforce. Maybe now they've gotten too expensive and we should be looking toward DC plans with long-term vesting or matches that accelerate in later years in order to encourage folks to stay.

Or maybe public sector retirement plans should start moving toward the FERS model used by the feds -- a modest but significant pension component, one with relatively sustainable benefit levels, with SS and a matched 401K component like the TSP.

If you look at all the purported literature about retirement planning, it's supposed to be a "three legged stool" -- but some state and local pension plans are generous enough to live on without any personal savings at all. The FERS model seems to come pretty close to the "three legged stool" approach with SS, DB pension and personal savings components, none of which are sufficient on their own but which are "enough" when combined.

The most important thing here, I think, to make sure that the promises are reasonable and sustainable, and not prone to extremely unpleasant surprises down the road for both pensioners and taxpayers. If a benefit level is something that will require 8-9% ROI in order to be solvent, it's probably too generous for its own good.

 

[utrecht]

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.

I agree with most of this except for that part that I highlighted in bold letters. The avg life expectancy for police and fire is significantly lower than the avg of the general population. I don't know the exact numbers but I see death announcements for retirees all the time and I'm constantly surprised at how soon these guys die after retiring. My personal opinion is that a lot of it is due to high stress for many years, shift work, and also the fact that a lot of cops and firemen don't take care of themselves. Cops seem to eat more junk and grease than the avg person does from what Ive seen.

All of this to say that the cops I see aren't collecting anywhere near as much over their retirement lifespan as they thought they would which may be one small part of the reason that my dept's pension is so healthy.

 

[ziggy29]

I agree with most of this except for that part that I highlighted in bold letters. The avg life expectancy for police and fire is significantly lower than the avg of the general population. I don't know the exact numbers but I see death announcements for retirees all the time and I'm constantly surprised at how soon these guys die after retiring. My personal opinion is that a lot of it is due to high stress for many years, shift work, and also the fact that a lot of cops and firemen don't take care of themselves. Cops seem to eat more junk and grease than the avg person does from what Ive seen.

I tend to look at occupations like cops and firefighters in a separate discussion because of the nature of their jobs and because there is no private sector equivalent on which to base compensation. I don't think too many people could do those jobs for 40 years or more. Yes, in many cases they need some pension reform as well (especially where spiking is concerned IMO), but they have a different dynamic than (say) paper pushers in an office environment and what makes sense for a filing clerk or administrative assistant may not make sense for a police officer.

 

[utrecht]

What is "spiking"? Collecting as much overtime as possible in the last few years to jack up your pension? If so, my plan doesn't include ANY overtime in the calculations.

 

[ziggy29]

What is "spiking"? Collecting as much overtime as possible in the last few years to jack up your pension? If so, my plan doesn't include ANY overtime in the calculations.

Yes, that's what it is. Some plans allow it -- so some may work a LOT of OT in their last year, or cash in all their unused leave toward final year compensation and things like that -- and these count for calculating their pension. In a few extreme cases, pensioners are able to get more from their pension than they ever received in base pay. It's probably no coincidence that some of the most threatened and insolvent plans allow it.

 

[youbet]

Yes, that's what it is. Some plans allow it -- so some may work a LOT of OT in their last year, or cash in all their unused leave toward final year compensation and things like that -- and these count for calculating their pension. In a few extreme cases, pensioners are able to get more from their pension than they ever received in base pay. It's probably no coincidence that some of the most threatened and insolvent plans allow it.

Actually Zip, spiking is more, much more, that just using OT or leave pay to increase the final few years salary. In Illinois, it was fairly common for early out packages to include huge raises for each of the last few years once the employee signed an intent to retire after that period.

So, a School Supt making $300k (yes, they make that much here) might get a raise to $400k his/her final years. Then, the retirement formula would wind up cranking out a pension equal to or greater than the Supt's working salary.

What really hurt about this common practice is the fact that the acturial info used to calculate pension fund requirements DID NOT include the fact that, due to spiking, pensions would be much, much higher than the formulas indicated.

So, two problems here. Politicians underfunding calcuated pension fund requirements and making promises to "make it up next year" plus pension fund requirements being dramatically understated due to spiking. That is, actual pensions being much higher than the formulas would indicate they're going to be.

In hindsight, it should be no surpirse to Illinoisians that the public pension funds are in for huge problems and will require significant tax rate increases to bail out, despite the current reform legislation.

I've mentioned several times that our northern neighbor, Wisconsin, has a viable system. It's 100% funded and pensions vary with market performance but never dip below the original amount. Changes in payout are buffered/smoothed by a five year averaging algorithm. It's pretty clever.

An interesting side note is that as the politicians try to wrangle a way out of this, they find themselves between a rock and a hard place. If they move funds away from social programs toward pension funding, lower income constituents and their advocates scream bloody murder. If the move money away from pension funding toward social programs, unionized public employees stop supporting them and launch publicity campaigns against the politicians. So there is a back and forth "spread the pain" component hindering objective solutions based on sound financial and management theory.

If it wasn't so sad and scary, it'd be funny.......

 

[utrecht]

As you said, its no wonder plans like that are in trouble. Not too mention the fact that they are giving all public pension plans a bad name. I get offended somewhat when I hear people talking about public pension reform because my pension plan, while generous, is still pretty fair I think, but when I hear about some of these things like "spiking" there's no wonder why alot of them are in trouble and people are outraged.

 

[youbet]

In my post above, I said that school dist superintendents earn $300k. Looking at top salaries in Illinois (they're on the public record), looks like I overstated things. Here's the top 200 wage earners in K- 12 public education in Illinois. Looks like Supt's would be in the low to mid-$200k range on average....... just scanning the numbers. Only a small handfull at $300k and up.

Sorry, didn't mean to mislead.

Click on the "top 200" choice for a sort of the top 200 salary earners.

Champion News - Setting the Standard

 

[clifp]

My personal opinion is that a lot of it is due to high stress for many years, shift work, and also the fact that a lot of cops and firemen don't take care of themselves. Cops seem to eat more junk and grease than the avg person does from what Ive seen.

All of this to say that the cops I see aren't collecting anywhere near as much over their retirement lifespan as they thought they would which may be one small part of the reason that my dept's pension is so healthy.

I suspect you are right. As I said some form of compensation seems appropriate for civil servants involved in particularly stressful and dangerous jobs. Ideally I like to see cops, fireman, and military after putting in their 25-30 yeaqrs spend say 5 years working in part-time (e.g 20 hours 3 months on 3 month off etc) doing training, community outreach, long term project etc, while collecting their pensions.

Or to put it another way a really don't have much of a problem of my taxes going to pay a 50 year old cop, firefighter, or marine's pension. A 50 year old former DMV supervisor collecting a full pension, while working for the transportation department for the federal government that pisses me off.

 

[kyounge1956]

Have you noticed how quick the lights go out in government buildings at the end of the day? (snip)

Ha

If you're talking about the lights in the Key Tower, they go out because they're on a timer. They automatically shut off at 6 PM and again at 7. I would assume the same is true of other City office buildings.

 

[45th Birthday]

OK, while there are some out there who have modest pensions after long service at below-market wages, there are vastly more who are going to collect fat pensions that the states cannot afford. I live in Illinois and the costs will bankrupt us if pensions don't change. It is a fact. I pay taxes by choice in this state. I can easily choose to domicile in a state which is responsible with its citizens' money. And I will if Illinois raises taxes without resolving the problem of unsustainable pensions.

 

[kyounge1956]

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.

You're writing (italics) as if dollars are going from the pockets of current employees directly into retiree's pension checks, same as current workers' Social Security taxes are being paid out in current SS benefts. I don't know how the Illinois state system is set up, but the City Retirement system here is nothing like that, and I don't know about "most local" pension systems, but in the City Employees' retirement system here, the maximum pension benefit available is 60% of your best two years' base salary, less than that if you have under 30 years of service. I'm not complaining, but it's hardly the "full income after 25-30 years" you claim public retirees are getting. Not only that, very few people are eligible for the maximum benefit at 50. You'd basically have to get hired straight out of high school—or at a pinch right after Junior College or a two-year stint in the military (if there is any such thing any more)—to have 30 years in by that age.

ISTM a lot of people on this board assume that all public employees are getting these gold-plated pensions, at very young ages, and that just isn't true. But what I'd really like to know is, since when are you the arbiter of how long people should have to work, whether in public or private employment? If private companies or government entities agree with their employees to set up a retirement benefit, who asked you whether it's overly generous? IMO, that's up to the actuary (i.e. is the funding mechanism adequate to pay the promised benefits) and the auditor (are the contributions being made as promised) to decide, not you.

 

[kyounge1956]

As you said, its no wonder plans like that are in trouble. Not too mention the fact that they are giving all public pension plans a bad name. I get offended somewhat when I hear people talking about public pension reform because my pension plan, while generous, is still pretty fair I think, but when I hear about some of these things like "spiking" there's no wonder why alot of them are in trouble and people are outraged.

What you said. I could sure do without the broad-brush characterization of government workers as under-worked and over-compensated. Anyone who thinks so, let me ask you: if working for the government is so cushy, why didn't you apply for the job? Instead, there seems to be an idea that what should be done is renege on promises made to those of us who did take that route, and the route itself closed off to all other possible future public employees. IMO, this smacks more than a little of jealousy.

I doubt it's the employees' fault these pension systems are underfunded—I'm guessing the employees' side of the funding is automatically deducted from their paychecks, same as mine is. They held up their end of the deal. They showed up for thirty years or more to teach your kids, repair your roads, staff and maintain your parks and libraries, supply your water and electricity, pick up your garbage, put out fires and catch bad guys. Why should they be punished because City or County councils or state legislatures didn't keep their side of the bargain?

I think spiking is reprehensible too (and it's not allowed on the system I'm in), but how is it any different, ethically speaking, from the numerous threads on this forum about how to game the tax system or the upcoming health insurance changes so that people who are actually quite well-to-do pay hardly anything in income taxes, or get their insurance subsidized when they could afford to pay for it on their own? How many variations are there on, "I didn't make the rules, I just take advantage of them"?

 

[kyounge1956]

OK, while there are some out there who have modest pensions after long service at below-market wages, there are vastly more who are going to collect fat pensions that the states cannot afford.(snip).

Do you have some facts to back up this assertion?

 

[Spanky]

but in the City Employees' retirement system here, the maximum pension benefit available is 60% of your best two years' base salary, less than that if you have under 30 years of service. I'm not complaining, but it's hardly the "full income after 25-30 years" you claim public retirees are getting.

60% of your best two years' base salary (if COLA also) would support our expenses forever - what a deal!

 

[kyounge1956]

60% of your best two years' base salary (if COLA also) would support our expenses forever - what a deal!

Oops, it's actually 60% of the average of your best two years. IOW, 60% of [(best year + 2nd best year)/2]. The pension is partially COLA'd. It goes up 1.5% per year, but with a floor at 65% of original purchasing power.

 

[ziggy29]

I think spiking is reprehensible too (and it's not allowed on the system I'm in), but how is it any different, ethically speaking, from the numerous threads on this forum about how to game the tax system or the upcoming health insurance changes so that people who are actually quite well-to-do pay hardly anything in income taxes, or get their insurance subsidized when they could afford to pay for it on their own? How many variations are there on, "I didn't make the rules, I just take advantage of them"?

It's no different. In both cases, I don't blame the individuals for taking *legal* advantage of loopholes to improve their take from the system. I blame the system itself and those who put said rules in place.

 

[ziggy29]

What you said. I could sure do without the broad-brush characterization of government workers as under-worked and over-compensated. Anyone who thinks so, let me ask you: if working for the government is so cushy, why didn't you apply for the job? Instead, there seems to be an idea that what should be done is renege on promises made to those of us who did take that route, and the route itself closed off to all other possible future public employees. IMO, this smacks more than a little of jealousy.

This common defensive rebuttal breaks down on scrutiny, IMO, for a couple of reasons.

1. The big pension benefits only come with longevity. Those of us in our 40s don't have time to get a big enough pension to make it worthwhile.

2. Some of us *did* choose a job with a pension and retiree health insurance in our 20s. I did. Problem is, retiree health insurance was taken away completely and my pension was frozen as puny levels. (Still want to talk about reneging on promises?) Is that somehow my fault for making a bad career/employer choice, keeping in mind this was in 1987? So are you saying I should have seen this coming in the private sector but knew governments wouldn't follow suit? That's a lot to ask of someone who was 22. And by the time these things were taken away, I was over 30 and lost 10 critical years toward building a killer set of retirement benefits based on longevity.

3. It's easy to say "we made our own bed" because we didn't have a crystal ball to see how the perks of private versus public sector would change over the next 20-25 years. Now if I were given the option of having a time machine to take me back 20 years, maybe I'd take you up on that government job offer. But it no longer makes sense given that any pension I could get for 10-15 years of service would be rather small.

I suppose you think it's our fault for not being able to tell the future in the 1980s when choosing careers and employers, and not knowing that by the 2000s the private sector deal would suck more and more compared to government work. If so, then I'm guilty of not telling the future. Fine.

Jealousy? Maybe a little -- or resentment that I had my deal taken away from me and now some of us facing declining real wages and high unemployment are asked to pay higher taxes to secure for others what was taken away from me and those like me. I could just as easily say that what you write smacks of defensiveness even if I don't see anyone here going after the pension benefits of those already hired or retired. I don't understand why those already in the system are so touchy about changing the rules for new hires -- especially if that's part of the way to secure the pensions of those already in the system. I just don't get it. Seems to me that protects taxpayers *and* those already in the system as employees or retirees.

 

[youbet]

I just don't get it. Seems to me that protects taxpayers *and* those already in the system as employees or retirees.

I've been surprised by the extent of the negative reactions too. The reform could have been so much more painful to current employees and annuitants considering the economy and the critical situation with state finances. My first reaction was that these changes were reasonable, didn't impact anyone who worked or is working under the old system and we had the bullet go astray. Luck was with us!

No promises are being broken. The reform only effects future hires. College seniors applying for teaching positions now and starting work next Sept still have the current plan. Current employees and annuitants see no change whatsoever.

The new retirement plan is still a good deal compared to SS or most private employer plans.

The biggest impact is on high wage earners since the salary level used for pension calculation is now capped at the SS salary contribution limit of about $106k. So I suppose that 30 - 35 yrs from now when School Superintendents (who today are still college students) retire with smaller pensions, they'll have it considerably different than today's Superintendents. But they do have prior knowledge and their whole careers to prepare.

All the things tax payers don't like about the current system such as spiking, purchasing years cheap (far below the value they add to the pension), extremely early FR age, etc., are still there for decades until today's children work their lifetimes and start to retire.

Perhaps the pushback is because the current employees and annuitants feel that this won't be the last change? That this might be opening the door to further changes down the road if tax payers continue to complain and push their representatives for relief?

 

[ERD50]

Well said, ziggy.

kyounge, if you go back to the OP, you'll see that:

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

Relatively modest changes that only apply to people who have not even been hired yet. In comparison, our mega corp made all sorts of negative changes to people during their careers. It would be a fairly long list that affected me, I probably couldn't even recall them all, because except for one or two (where we could choose the new plan, or stick with the old), we had no choice in the matter.

Maybe I am a bit 'jealous', but I tend to think that we all make choices, I made mine, and we never really know how things are going to turn out. We know life isn't fair anyhow, so it is what it is. But I do get to the point of feeling like telling some of the govt pension people to 'get off their high horse' when they seem to be saying that their benefits must be untouchable, when the people paying for those benefits don't get that same deal.

Maybe that helps explain some of the frustration from some of us. Oh, and I do think you are a bit guilty of painting with a broad brush also. As some have already mentioned, I don't think that most of us are mad at the people collecting the pension, but we are mad that our rulers have put us in this position. And frustrated.

-ERD50

 

[ERD50]

The biggest impact is on high wage earners since the salary level used for pension calculation is now capped at the SS salary contribution limit of about $106k. So I suppose that 30 - 35 yrs from now...

Didn't see you posted while I was typing, so let me add a comment to this one.

Interesting that you describe this as 'the biggest impact', as there is also a lot of push to raise the SS max so that high income people keep paying SS taxes. I gotta wonder if that was in the back of their minds when they wrote that? Could be that 'the biggest impact' goes bye-bye? Then we are not left with much reform, are we?

To the extent that it is a small step, I'm glad they are doing at least something. But since it seems like too little, far too late, I hope they don't pat themselves on the back and act like the problem is solved.

-ERD50