By: Ted Dabrowski and John Klingner
Wirepoints’ recent commentary on Illinois’ skyrocketing pension benefits – “Janus v AFSCME and the truth about Illinois pensions” – left many readers questioning where that massive growth in pension promises came from.
In our report “Illinois state pensions: Overpromised, not underfunded,” we showed how the growth in total pension promises to state workers and retirees has overwhelmed Illinois’ economy and residents’ ability to pay. Illinois’ total pension promises since 1987 are up 1,061 percent, 4.5 times more than the growth in the state economy.
The answer to where that growth came from is simple. The growth is due to overly generous benefits. In addition, reality occasionally forces more honest disclosure of the true cost of pension promises made. In other words, more accurate reporting also pushes the numbers up.
Illinois politicians have doled out all kinds of expensive benefits over the past few decades, from compounding cost-of-living increases to service credit for unused sick leave to early retirement ages.
That’s caused a host of problems, because the Supreme Court has declared that the pension benefits of current workers untouchable. The state’s constitution says pension benefits can’t be “diminished or impaired.”
It’s a hypocrisy. Pension perks can be increased ad infinitum, but it’s impossible to scale back benefits that existing workers haven’t even earned yet.
Take teachers and their benefits, for example. Their pension fund makes up more than half of Illinois’ promised pension obligations.
The Teachers Retirement System publishes the entire list of changes to the pension plan since 1915. Teacher pensions were generous to begin with, yet lawmakers continued to add new sweeteners and bigger benefits over time.
Below is a list of some of the biggest changes:
Cost of living increases
Overly generous cost-of-living benefits – compounded and granted automatically regardless of inflation – are what arguably cause the most fiscal stress to pensions’ solvency. What started as simple COLAs at levels approximating inflation have now become compounded yearly increases that double a retiree’s annual pension after 25 years.
- 1969 COLA increased to 1.5 percent simple
- 1971 COLA increased to 2 percent simple.
- 1978 COLA increased to 3 percent simple.
- 1990 The 3 percent annual COLA increases begin compounding annually.
Pension benefits for every year worked were originally calculated as 1.5 percent of each worker’s “average final salary.” The max starting pension was restricted to 60 percent of a teacher’s final salary. By 1998, that amount was increased to 2.2 percent of salary and max starting pension became 75 percent of final average salary.
Under the original rules, a teacher had to work 40 years to get the 60 percent maximum. Today, a Tier 1 teacher only needs to work 34 years to get to a much higher 75 percent maximum.
- 1947 Pension formula: 1.5 percent of average final salary per year of creditable service. Average final salary calculated based on the last 10 years of service. Maximum starting pension as a percentage of final salary became 60 percent.
- 1971 Pension formula upgraded to 1.67 percent for first 10 years; 1.9 percent for next 10; 2.1 percent for next 10; and 2.3 percent for years over 30. Average final salary calculated based on the highest four consecutive years within the last 10 years of service. Maximum starting pension as a percentage of salary became 75 percent.
- 1998 Pension formula upgraded to 2.2 percent a year. TRS member contributions increased by 1 percent.
Sick leave benefits
Unused sick leave days in the private sector are typically use it or lose it, with some limited ability to roll over unused days to the next year. But teachers in Illinois, and many public sector workers, get much more. They can accumulate unused sick leave days over the course of an entire career – and then cash them in as years of pensionable service – an extremely generous benefit unheard of in the private sector.
- 1972 Credit for one-half year or 85 days of sick leave granted.
- 1984 Maximum of one year of service for 170 or more days sick leave credit granted
- 1998 Sick leave could be used for credit, if not compensated in any way.
- 2003 Members with up to two years of unused sick leave credits could exchange that sick leave for up to two years of service credit.
Teachers can begin drawing pensions with full benefits while still in their 50’s. And a majority of teachers took advantage of this rule. Sixty percent of teachers currently collecting a pension retired in their 50’s.
- 1947 Retirement permitted at age 55 with 20 years service and at age 60 with 15 or more years of service
- 1969 Retirement permitted at age 55 with 20 years of service, 60 with 10 years service; age 62 with 5 years
Some of these increases were paid for with increased employee contributions, as outlined in the TRS document outlining the benefit increases. But many were not.
And that’s left Illinois residents holding the bag.
Telling the truth
A second reason the reported cost of Illinois pension promises have grown is because Illinois politicians are being forced periodically to measure that cost more honestly.
They are often forced to change outdated assumptions that understate those benefits. For example, retirees are living far longer than originally assumed. And assumed stock market returns are overly optimistic.
As those faulty assumptions are corrected, the amount owed to pensioners only goes up.
In 2016 alone, assumption changes contributed $10 billion of a $17 billion jump in promised pension benefits.
The combination of benefit increases and assumption changes have been going on for years, as reflected in the leading graphic of this piece.
As a consequence, the cost to taxpayers has increases year after year. The employer’s (taxpayers’) annual “normal costs” for teacher pensions has grown 5 times since 1987, far in excess of the economy. And as a percentage of payroll, employer normal costs have grown to 10.1 percent from 7.3 percent, a 38 percent increase.
Incompetence or Malice?
A financial mess like the one Illinois politicians have created would normally be investigated.
If this state were a corporation, think Enron or Worldcom, an official inquiry would be asking all sorts of questions. How did lawmakers get pensions so wrong? Was the extreme growth in benefits due to incompetence or was it purposeful?
Either way, lawmakers hid a massive liability from Illinois residents for decades. That’s damning proof they should never have been in change of government worker retirements in the first place.