Pension Committee Works to Reign in the Elderly Workers' Alternate Earnings: (Money Purchase Options)
Last week, we looked at the terms, annual required contribution, age entry normal cost method, and projected unit credit cost method. This week we look at a rare but more likely outcome given educators, who may decide to remain working out of necessity for much longer periods of time given Illinois' educational climate.
Background: Very recently, Senator Daniel Biss of Skokie has identified an opportunity to be found in a leak of information from the Pension Committee of Ten, on which he serves. His comments follow:
“This brings me to my second topic: a leaked media report about some of the committee’s deliberations. On Friday, August 23, several news outlets published a list of items under consideration by our committee…
These ideas are in fact all under discussion by the conference committee, but nothing has been finalized yet and our conversations remain in a state of flux. That means that this is an ideal moment for you to share your feedback on these items, as well as any other thoughts you have on the pension issue. I look forward to hearing your thoughts as we hopefully enter the late stages of our deliberations, and I very much hope that we will be able to reach a compromise that, while painful, will be manageable for all stakeholders and will put our pension systems on a clear path to stability” (http://senatorbiss.com/).
This Week: One of the bulleted leaks in the Senator’s memo considers “Changing interest rates used to calculate the money purchase option formula.”
Money Purchase Options (often called PBO’s for Purchase Benefit Options) are simply another mathematical method to calculate the pension payout due to a retiree after so many years of service.
Most teachers and state employees determine their pension earnings through a calculation that regards average salary combined with number of years teaching. According to the most recent TRS information, “Average salary is the average of the four highest consecutive annual salary rates within the last 10 years of creditable service.” The number of years teaching is based upon a multiplier, usually 2.2% for the Early Retirement Option. “Years of creditable service determine the percentage of the average salary to which you are entitled” (http://trs.illinois.gov/members/pubs/tier1guide/retirementbenefits.pdf ).
But some educators/workers who have been teaching before July of 2005 may calculate their pension payout using the method called a money purchase option. Senator Biss communicates the Committee wants to change the interest rates that determine this number – the change will be to lower it. Here’s why:
Chris Wetterich in the State Journal Register explained, “The money purchase option is typically for teachers who taught for extraordinary lengths of time. A member is eligible if the sum of his or her contribution and his or her employer’s contributions, plus interest determined by state statute, would provide a greater monthly benefit” (http://www.sj-r.com/top-stories/x2128843634/TRS-report-raises-questions-about-timing-of-pension-vote).
The report continues, “For example, an 81-year-old teacher recently retired who was eligible for the money purchase option after teaching for 58 years. That teacher would receive a pension of roughly $68,000 a year under the regular formula. Under the money purchase option, he would receive $174,000 a year, according to TRS spokesman David Urbanek.”
By the way, this was back in fall of 2011.
Money purchase options were an unexpected devilish detail that proved a problem for then-House Minority Leader Tom Cross during his push for SB512, but don’t think they’ve forgotten in the General Assembly. The Committee is working to circumvent this possibility by lowering those statutory interest rates – and by using the other bullet in Senator Biss’ memo: a decrease in employee contribution by 1%. Lowering the contribution rate becomes another factor in blocking an alternate, higher payout for longer years of service.