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There’s more egg on the faces of last year’s Tier III pension reform champions than we knew.

You may remember that the current year’s budget, finally passed last July, assumed savings of $500 million per year from pension reform. The savings were to be accomplished through implementation of a Tier III benefit level for new hires.

We learned last year that it wasn’t feasible to get it done that quickly, which should have been obvious from the start. Now, however, it’s clear that Tier III can’t go live until the 2020 fiscal year, which starts July 1, 2019, at the earliest. That’s according to the website for TRS, the pension for teachers, which accounts for about 60% of the unfunded liabilities at the state level. I believe the other affected pensions would likewise have to wait until then, though that’s not entirely clear.

And will it really save $500 million per year? Don’t believe it until you see it. Nobody ever did any analysis on it. The Tier III plan was one of many things stuck into the 700-page budget implementation bill by Democratic leadership and lawmakers had only hours to review it.

When it became clear last year that the $500 million had no basis, Democrats blamed Governor Rauner, whose office first put out the number. In fact, both Rauner and every member of the General Assembly who voted for it deserve blame.

They didn’t understand it then and they still don’t.

I wouldn’t be surprised if we ultimately learn that the changes save nothing. That’s because most current Tier II members are expected to opt into Tier III, which is allowed under the new law. But those current Tier II members today are paying in more than the actual cost of their own benefits. They’re basically paying a premium to subsidize the system to prevent it from sinking faster than it is. Losing their subsidy will actually cost money, not produce savings.

It’s just another example of why we keep saying that defined benefit pubic pensions are hopelessly opaque, easily corrupted, and fundamentally incompatible with any notion of informed democracy.

Mark Glennon is founder of Wirepoints. Opinions expressed are his own.

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jaherzrent

Offering a lump sum option to Tier One pensioners would quickly result in the plan bucket being empty. Watch solidarity crumble as people rush to the exits. I bet the system could offer lump sums at a 25% discount from the present value of the pension annuity, and people would still rush to the exits. In fact, the system should put out an offer such as “how low will you go” and cash out those who are willing to take the biggest haircut. That’s the way to reel in that can down the road.

Mark Glennon

And actuaries I’ve talked to ridicule the idea because the first takers would be people with health issues. When they cash out and you take them out of the risk pool, that destroys the actuarial basis for the remaining pool

Advocate

When Tier 2 has neutered pensions in Illinois below the benefit level of Social Security….and it has… the call for new DB plans is piling on a dead horse. Ive been saying this, here on wirepoints, for years. Unless ya honestly want to help public labor obtain portability over their retirement, at a higher cost to taxpayers. DB plans will only add costs and not save. This portability feature was oft cited for a reason to switch to DB plans…still is… but now, FINALLY, when its realized this DB portability would only help public labor, and would hurt the States… Read more »

Steve-Oh

Mark: That’s a remarkable way to state the disaster, “DB pensions for govt ees are opaque, easily corrupted and incompatible with an informed democracy”.
Brilliant….. I’ll remember that !
Cheers “PF” brother !

Bross

Taxpayers should expect much more from our elected officials. Sadly we end up with very little to solve the really big problems.