Blog: State Pension Plans

Illinois’ $111 billion unpaid pension debt--over half of which is due to teachers--has prompted talk over a federal bailout. Illinois policymakers continue debating fixes without any real long-term solutions, let alone a budget

But the $58 billion question remains: how well are Illinois teacher pensions actually serving its workers?

Unfortunately, not that well. Despite its high price tag, Illinois’ teacher retirement plan is doing a poor job of serving the majority of its teachers.

Last week, Chad Aldeman, Daniel Fuchs, and I released a report that examines the benefit structure for Illinois’ teachers. New teachers, in particular, face substantially lower retirement benefits than teachers hired before the recession. In 2011, in response to worsening financial conditions, the state legislature created a less generous plan for new teachers called “Tier II.” Tier II imposes on teachers a higher minimum service requirement (up from five to 10 years, making it more difficult for new teachers to qualify for a minimum benefit), a higher normal retirement age (meaning teachers have fewer retirement years to collect a pension), a less generous pension formula (calculating the final average salary from the last eight years of service instead of just four), and a lower, uncompounded cost-of-living adjustment (COLA).

The graph below compares Tier II benefits for new teachers to the prior Tier II plan. Notice how the red line dips negative for the first two and half decades of a new teacher’s service. This means that a 25-year old Illinois teacher hired after 2011 won't receive a net positive retirement benefit until she's worked at least 26 years. Until then, she’ll pay a penalty just to participate in the system.  

 

Pension plans failed to meet investment targets last year. What will that mean going forward?
Wishing away pension funding problems won't change the fact that current plans are simply not delivering sufficient retirement benefits to the majority of the teaching workforce.
Unlike the rest of Illinois, Chicago only receives a small sliver of pension funding from the state.
Pension and other structural debts continue to eat away at district resources. CPS is counting on the state for relief.
Asking "what's the average pension in my state?" is a common question, but it's the wrong one to ask. "Averages" hide a lot of nuance.

New Jersey Governor Chris Christie certainly doesn’t beat around the bush. In an interview with Jake Tapper, New Jersey Governor said he prefers to deal with bullies with a “punch in the face.” Who deserves this? The teachers’ unions, according to Christie.

While this sort of brash talk may attract attention, it isn’t good for negotiating reform. Ironically, Christie actually has a good reform proposal. Christie’s pension committee calls for a cash balance plan, a type of defined benefit plan that accrues benefits evenly rather than the bumpy accrual of the current backloaded plan. The cash balance plan would provide better benefits for early and mid-career teachers who get shortchanged by the current plan and better fiscal housekeeping for the system.  

But Christie’s politics are preventing this reform from moving forward. The teachers’ unions are still fuming over the Governor’s decision to go back on his promise and shortchange the pension fund.

As Christie continues to play with fire, however, he may stymie the state’s chance for genuine reform of its pension systems.    

California's massive pension debt is now over $198 billion, impacting new and future workers.
Not all teachers can receive a full refund plus interest on their contribution. And for many, participating in the state system comes with other trade-offs.
New Jersey teachers are still angry with Governor Chris Christie for shorting the pension fund and are now suing for $4 billion total in damages.