Pension Reform: A Way Forward

It is time to face facts.  Our pension system needs to change.   The system is in jeopardy because it has been underfunded by the legislature for years.  Now the state itself is full of additional financial woes and needs to get them in order.  Our political leaders need to cut spending in order to balance the budget.  They need to revise the tax code.  And they need to make sure they pay their bills on time. 

The We Are One coalition has announced a "pension summit" to bring legislative leaders and union leaders together at the table.  I hope this meeting is productive.  Yet I do not know where their discussion will begin, because the two sides do not appear to have much common ground.

I have not been satisfied with other pension proposals I have seen thus far and I do not know what ideas will be discussed at the summit.  Therefore I would like to humbly propose my own plan as a way forward.  Personally I would much rather make some reasonable changes to the current system that will preserve and strengthen it than to be too stubborn and risk losing almost everything. 

Willingness to change the current system should not be taken as willingness to destroy it or blindly make changes without certain preconditions.  We should receive some safeguards in exchange for any changes made to the pension system.  These safeguards include the following:   

I. Pension funding needs to be legally guaranteed.   Any solution must guarantee that the state will uphold its end of the bargain, and no further changes to the pension system can be made.

II. Cost shifting is not an option.  The state must not pass its own failures on to local districts to bear the burden.

III. Current benefits for retirees cannot be reduced.  This protection is provided by the state constitution. 

IV. Any changes to the pension system should apply equally to all participants.  While the specifics of this proposal deal primarily with TRS, since that is the pension fund I am familiar with, the same changes should be made to all of the state pension programs.  Teachers should not be the only group affected by changes.  These should apply to police, firefighters and other public employees.  There may be instances where some minor differences exist, but the spirit of these changes should be sought to be uniformly implemented.

Once those safeguards are in place, reasonable changes to reduce the cost of pensions, restore financial stability to the system, and create revenue to fund the system should be utilized.  The following solutions should be implemented: 

For active teachers:

1)      Increase teachers’ contributions to TRS from 9.4% to 10.4%. 

2)      Change the retirement age.  This applies mostly to teachers who were hired right out of college and will be fully vested into the system by age 55.  Teachers that started their career later would most likely work until they were older to be fully vested or simply take a lower benefit.  The retirement age would be increased based on a member’s age when the law goes into effect:

1. Teachers 50 and older would not see any changes.
2. Teachers 48 or 49 years old: Must work an additional two years to receive full benefits (could retire at age 57 with at least 35 years of service).
3. Teachers 42 to 47 years old: Must work an additional three years to receive full benefits (could retire at age 58 with at least 35 years of service).
4. Teachers 37 to 41 years old: Must work an additional four years to receive full benefits (could retire at age 59 with at least 35 years of service).
5. Teachers 36 and younger: Must work an additional five years to receive full benefits (could retire at age 60 with at least 35 years of service).

3)      Change how a teacher’s years of service are calculated.  Currently a teacher can earn up to two years of service by banking sick days.  Reduce that to allow teachers to earn only one year of service this way.  As an alternative this provision could be eliminated and replaced with a flat fee for unused sick days, similar to when employees in other fields are paid for unused vacation days. 

4)      Change how a teacher’s final average salary is calculated. 

1. Instead of averaging the last four years of service to determine the final average salary, average the last eight years. 
2. Only a teacher’s base salary (not pay for coaching, sponsoring clubs or other extra stipends) would be used to calculate the final average salary.  This would also mean that teachers would pay into TRS based only on their teaching salary.
3. Eliminate end of career raises to boost final average salaries.  A teacher (or any other state worker eligible for a pension) in his or her final years of service should receive the same type of wage increase available to all other teachers in that district.  This provision eliminates the 6% raise given by many districts to teachers in their final years of service.  It would not eliminate raises due to completion of advanced course credit.

5)      Cap the maximum pensionable salary.

1. The cap should be set at the social security wage base, which for 2013 is $113,700.  This number would increase when the social security wage base increases or could be set to increase with some other automatic measure.  Realistically this cap would not affect most teachers, since the average salary of teachers in Illinois is $66,000.  However, some teachers at the end of their career and many administrators would be affected by this.  Practically speaking, however, any employee who reaches the cap and is fully vested into the system would still receive a pension of around $85,000, which is still a significant benefit for a retiree.  
2. No teacher or administrator should pay into TRS for salary received over the social security wage base.  Since any salary amount over $113,700 would not be counted towards a teacher's or administrator's pension, it would not be fair to require them to pay extra into the system for a benefit they will not receive.   
3. For any current teacher or administrator whose salary is already above the new cap, their current salary would be their maximum pensionable benefit.
   
   

6)      Create a pension cap for workers who receive multiple state pensions.  I would suggest using the social security wage base as the cap for this situation.  For example, no individual could receive one pension for $70,000 and another for $60,000 because the cap would limit this.  They could receive a total of $113,700 from both pensions combined.  

For active and retired teachers: 

7)      No teacher or administrator would receive a pension while they are employed in education half-time or more, even if working outside of the state of Illinois.    

8)      Change how the COLA is calculated and implemented while also reducing the rate. 

1. For all current and future retirees, the COLA would be calculated as follows: 3% of the first $30,000 of a pension and 2.5% of the next $20,000 of a pension. 
2. Any pension amount exceeding $50,000 would not receive a COLA.  This $50,000 COLA cap would remain flat for 3 years then increase with inflation.  Any increase due to inflation would be subject to the 2.5% COLA. 
3. After the COLA freeze (described below) expires, any retiree whose pension is at or above $100,000  would only receive a COLA every other year.   

9)      Freeze the cost of living adjustment (COLA) for some current and future retirees.

1. All new retirees would be subject to a three-year COLA freeze, unless they are subject to a longer freeze described below. 
2. All new and current retirees receiving a pension at or above $85,000 would be subject to a four-year COLA freeze. 
3. Any current or future retirees receiving a pension of $130,000 or more will be subject to a minimum 6 year COLA freeze.  After six years they would not receive a COLA until the maximum pensionable salary was raised to meet or exceed their current pension.  They would then receive a COLA every other year.  Realistically, a person receiving $130,000 or more in their retirement should be able to still live comfortably without a COLA.  For comparison, $130,000 represents almost double the current average teacher salary for active teachers.

Increased revenue:

Any solution must not only reduce the cost of the current pension system, but should also find additional revenue to put into the system so it can return to its proper level of funding.  Part of this is accomplished by having teachers and other employees in the state pension funds pay more into the system as mentioned above.  The one percent increase described above raises about $175 million dollars per year.  However, additional strategies should be used to further accomplish this task.  

Some proposals that I have heard thus far are as follows:

A) Certain tax breaks should be eliminated as a way to have the state collect more money.  This is the approach proposed by the We Are One coalition.  The idea behind eliminating some of these loopholes is that they are unfair or illogical.  One example is the fact that people who subscribe to cable TV pay a higher tax than those that subscribe for satellite TV.  Both are TV subscription services and should be taxed the same. 

B) Illinois should switch from a flat income tax to progressive income tax.  The logic behind this is that both lower- and middle-class residents are taxed at the same rate as upper-class residents, and taxing the upper class more heavily will produce more revenue.

C) The state should lower taxes on businesses to encourage them to hire more people.  The logic behind this is that more employed workers means more people paying income tax and also spending money on goods, whereby the state revenue from sales tax would also increase.

D) Illinois should look for new taxes to put in place to allow the state to collect additional revenue.  One such tax is the speculative sales tax proposed by Dr. Bill Barclay.  He argues that if both the buyer and seller pay a $1 tax on all trades made on the Chicago Board Options Exchange and the Chicago Mercantile Exchange  it could translate into billions of dollars in tax revenue for the state.

E) Illinois should consider eliminating income and corporate taxes and replacing them with a consumption tax.  Some other states have started to do this by lowering tax rates and closing some loopholes.

 I firmly believe that the legislature needs to have serious discussions to determine the best path forward--not simply the most popular or easiest when it comes to revenue.  Furthermore, since any tax increase always takes money out of the hands of individuals, it is imperative that many citizens of Illinois share in this part of this discussion. 

One final thought about revenue: any new money collected by the state should be is split on a fifty-fifty basis, with half going toward the state's debt to the pension systems and the other half to fund other necessities.  It should be clear that none of the new revenue should replace existing funding to the pension system or other areas, but should be used in addition to current funding.

Closing Thoughts

I ask my fellow teachers to pause and consider: How would these proposals actually affect you? Would your pension be smaller? Absolutely. Mine would too. But I do not think that the reduction is so dramatic as to make teachers suffer in their retirement. The proposed changes above are fair and reasonable, especially when compared to the retirement benefits of most Americans.  Most other Americans rely on social security and employer matched retirement funds for their future.  Most of us will not receive social security.  And for us, our employer matched fund is this pension system.  It is my hope to restore health to that system.

If you think these are reasonable, I ask you to share them with your fellow teachers and legislators. If you disagree, I ask you to please offer your own thoughtful solutions.  I believe that the solution to this problem lies within our grasp and by working with fellow teachers and our legislators we can achieve our common goals: to preserve the pension system and restore financial stability to Illinois.