When Do I Break Even?

Will Your Contributions to TRS Ever Match Your Eventual After-Retirement Earnings?

Or

When Do I Break Even?

Or

What Will Tier III Do To Me?

Have you ever wondered just how many contributions to your retirement plan it would take before you broke even?  Breaking even would be that point in a teacher's career where her contributions would match the value of her benefits in retirement?  "Value" is an actuarial measurement of the returns or benefits of the pension, including life span expectations and other factors. 

If you read the Chicago Tribune, listen to the administrative support team of Governor Rauner (Illinois Policy Institute), or have a family member or neighbor who works in the private sector and abhors taxes of any kind – well, you’d think you would get a sweet return which would always wash over what you put in, wouldn’t you?

But you’d be wrong.

Nearly 3 out of 10 teachers leave the profession within the first five years, and we can expect their contributions to the pension systems will never match any real return. In fact, they’d be wise to take it with them.

Pension contributions are back-loaded.  That means that teachers put in increasing amounts as they gain experience and raises (salary) in the classroom.  In Illinois, 9% of $25,000 starting salary is much less than the later multiple-degree salary of $60,000.  In fact, only about half as much. 

Somewhere out there in the future, the meeting between what teachers have given and what they will earn in benefits crosses. 

According to a recent research paper looking at all states, that moment of contributions' and benefits' equivalence may be longer away than any teacher thought, and it will be VERY dependent upon the specific state’s retirement program. 

Two significant findings occur in this brief, “Negative Returns: How State Pensions Shortchange Teachers.”

https://www.teacherpensions.org/resource/negative-returns-how-state-pensions-shortchange-teachers

“First, in the median state, teachers must serve at least 25 years to receive a pension worth more than their own contributions. Teachers with shorter careers get no school-financed retirement benefit despite their many years of service. They may be better off taking back their own contributions when they quit rather than waiting to collect a pension.

“Second, the authors estimate that more than three-quarters of new teachers will earn less in pension benefits than they contributed to the plan. Instead of benefiting from their pension plans, most teachers are net contributors."

Why?  Because new plans in many states – known in Illinois as Tiers – will push the intersection of contributions and expected retirement earnings far into the future.  In Massachusetts, for example, recent changes for new hires have made it IMPOSSIBLE for any of them to ever meet the parity between contribution and retirement benefits/earnings. 

According to the authors, Aldeman and Johnson, Tier I teachers in Illinois can expect to achieve a “breaking even” point after 28 years of teaching. 

The plan for Tier II in Illinois, which passed the General Assembly in less than 24 hours, asked new hires after January of 2011 to pay the same contribution as Tier I for less in retirement benefits:  a simple rather than compounded annual cost of living increase, a capped retirement annuity at $112, 408, a retirement age of 67 and with severe deductions for an earlier exit,   

This means that actuarially, Tier II teachers will need to provide classroom instruction for 35 years before the “break even point” in deserved benefits.

Only Hawaii and Ohio match our current adverse calculation.  All other states are less.

Enter stage right: TIER III:

The creation of a “new” Tier III (SB42) was cradled within the bills recently enacted in the Illinois General Assembly to override the potential veto of a new budget.  The bills sponsors – Senator Donne Trotter and Representative Greg Harris – managed a bill of nearly 800 pages, which included the language adopted to create a new Tier III, which provides for a “defined contribution” (403b) in a hybrid arrangement with a lesser-earning defined benefit (pension).

According to Representative Harris, the task of implementing the bill’s language will fall upon the TRS, SURS, and SERS.  Following the outline of language within the bill, they will develop the structure that will assure new hires of a certain date (possibly sometime in 2018) to enter into the new Tier.  Or they may decide not to. 

New hires will also be able to choose Tier II, the plan where working 35 years brings benefit parity with a ceiling cap.  Or they can choose Tier III. 

And so can ALL the Tier II current hires.  They can move from Tier II to Tier III and participate in a part pension and part 403b program.

If you’re confused, imagine what a finalized contract booklet will look like.

Oh, by the way, your selection is irrevocable.  Hotel California, my friend.  

We Are One Illinois provides no information thus far on the new Tier.  Illinois Federation of Teachers does not have anything either.  Go to TRS, and you will find a cogent description of the new bill by Mr. Ingram’s office.  Go to IEA, and you will find a Frequently Asked Questions review of the benefits, which states, “The IEA and all the unions within We Are One Illinois labor coalition took a position of neutrality.”

 https://ieanea.org/2017/07/13/tier-iii-pensions-frequently-asked-questions-and-answers/

For me, a position of neutrality is unsettling.   Here’s why:

Tier III offers some tantalizing differences for the burgled Tier II teacher now 6 years into their profession.  Tier III will raise her retirement earnings ceiling from $112,000 to $127,000.  Contributions for a Tier III teacher will be reduced to 6.2% of salary, rather than the 9% they are now paying.  And they will be provided a defined contribution (think a 403b), for which they will pay 4% of salary and the local will match from 2% - 6%. 

Looks good from far, but it’s far from good.

Tier III reduces the multiplier for final average annuity from 2.2 to 1.25.  This means the break-even point will be moved nearly 40% further into the future.  What took 28 years or 35 years to make parity will take MUCH longer!  Example:  Under 1.25, a teacher will be eligible for 50% of a final averaged salary in 40 years.  The cap of 75% of earnings in retirement will take the Tier III teacher 60 years of teaching.  Start at age 25 and work until 85?

The annual cost of living adjustment will no longer contain a 3% simple rate.  Retired Tier III teachers will receive only will get ½ of the CPI, but nothing below zero.

According to Representative Harris, any teacher electing to move from Tier II into Tier III will have her multiplier frozen at 2.2 for those previous Tier’s years and altered to a 1.25 multiplier from thence on.   Example: Six years at 2.2 will equal more than 13% of final averaged salary.  At 1.25%, a bit over 7%. 

For the people who want “their own” portable investment program – a 403b – this may be perfect.  Not interested really in teaching? Teach a few years before finding another suitable profession.  

Interested in making a career out of teaching? Illinois may not be the place to seek a long-term vocation which honors your commitment with a once-promised retirement.  

In the FAQ section of Tier III for the IEA, leadership in IEA states, “We knew pension legislation of some kind was going to have to pass for there to be a budget.  So, we worked to ensure the unconstitutional model, which had been part of SB16 was not included.  Additionally, we worked to make sure end of career salary increases which could be sued for calculating one’s pension were not reduced from 6 percent to the consumer price index.” 

In Rauner’s outline of the budget, his office identifies the move to a defined contribution as a first priority for our state.  His interest in a consideration model, as proposed by Senate leader Cullerton is extremely valued, but not until some certitude as to its acceptance by the Illinois Supreme Court can be determined.  In other words, to be announced later.  It’s coming.

But, in actuality, don’t we now already have at this point a form of consideration for those people in Tier II and those coming in at Tier III very soon?  Choose a Tier II and pay more for less – even to the point that your funded ratio in Tier II is now 155% - or choose Tier III, where you can be given less for longer service in exchange for a 403b program which can be taken when you realize you’re being ripped off.

The ultimate ramifications of this “new” Tier increase my concern for our beleaguered educational system in Illinois.

Neutrality? 

When Attorney general Madigan argued her "Soveriegn Powers argument" against the IRTA legal team in 2015, she put forth an affirmative defense - an admission of possible illegal action as more acceptable out of a more pressing need for the greater good of the State.  The Court denied that rationale.  The argument from IEA seems a defensive affirmative.  We are maintaining a position of neutrality because it could have been worse.  

It would seem we didn't win this battle, nor did we battle.