Illinois Pension Reform Q & A


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Illinois Pension Reform Q & A

  1. 1. Illinois pension systems reform update I L L I N O I S S E N AT E D E M O C R AT I C C A U C U S Q & A U P D AT E D 1 2 / 1 1 / 1 3
  2. 2. Who is affected by this law? The new law imposes changes on Tier 1 workers and retirees in the State Employees’ Retirement System (SERS), State Universities Retirement System (SURS), Teachers’ Retirement System (TRS) and General Assembly Retirement System (GARS). A Tier 1 worker or retiree is someone who was hired before Jan. 1, 2011. A previous law changed pension benefits for all employees hired after that date. This law takes effect June 1, 2014.
  3. 3. Are local government employees affected? No. This covers state employees, state lawmakers, state university employees and suburban and downstate teachers. Local and county government employees have their own pension system, which is not part of the state systems. .
  4. 4. Why aren’t Chicago teachers included? The Chicago Public School system has its own pension system, which is mostly funded by local tax dollars rather than state tax dollars. On the other hand, suburban and downstate public school teachers are considered state employees in retirement and participate in a state retirement fund, the Teachers’ Retirement System (TRS).
  5. 5. Are lawmakers and their staffs affect the same as other public sector workers? Yes. The changes to cost-of-living adjustments and future changes to retirement age are imposed on lawmakers and legislative staff employees the same as any other public sector employees. General Assembly members are covered by the General Assembly Retirement System. Legislative staff members are covered by the State Employees’ Retirement System.
  6. 6. Why aren’t judges included? Since this case will ultimately be decided by the courts, removing judges’ pension benefits from this law removes a potential conflict of interest in having them rule on the law’s merits.
  7. 7. What benefit changes will occur? Retirement age: Workers age 45 and younger will have to work longer to qualify for retirement. For each year an employee is younger than 46, the retirement age increases by 4 months. For example: A 40-year-old (six years younger than 46) would see the retirement age increase by two years. Current Tier 1 employees (those hired before January 2011) younger than 30 would work an additional five years. NOTE: No change for those 46 and older.
  8. 8. What benefit changes will occur? Cost-of-living increases: The automatic 3 percent compounded annual increase in retirement income is replaced by a system based on years of service and tied to inflation. (See worksheet)
  9. 9. What benefit changes will occur? Delayed cost-of-living increase: Current Tier 1 employees (those hired before January 2011) would miss annual adjustments upon retirement. How many COLAs are missed depends on the age of the employee and ranges from one to five. NOTE: The underlying pension is not affected during these delays. Those ages 50 or older would miss one adjustment. It would occur in the second year of retirement. Workers age 49 to 47 would miss three adjustments in retirement (years two, four and six); workers age 46 to 44 would miss four adjustments (years two, four, six and eight); those 43 and younger would miss five (years two, four, six, eight and 10). - - more - -
  10. 10. What benefit changes will occur? For example, employees now 48 would miss three adjustments on the following schedule when they retire: There would be a COLA the first year, they would miss the second-year COLA, get the third-year COLA, miss the fourth-year COLA, get a COLA in year five, miss the COLA in year six and then get annual adjustments from then on. NOTE: No delay for those already retired.
  11. 11. What considerations were made for employees? Reduced contribution: Employees would have less taken out of their paychecks. The contribution rate drops by 1 percentage point. If you currently have 9 percent taken out of your paycheck toward your pension, that deduction would be reduced to 8 percent. NOTE: Several proposals called for a 2 percentage point increase. Funding guarantee: If the state doesn’t make the required payment to the pension funds, the pension systems can go to court to force the state to make the payment. The state retains ability to adjust payment schedule.
  12. 12. What considerations were made for employees? Pension stabilization fast track: Beginning in 2015, the state will contribute 10 percent of the pension savings from this legislation back into the pension systems. In addition, the state would put an extra $364 million into the pension accounts beginning in the 2019 budget year and then an extra $1 billion annually until the pension funds are fully funded. This “add on” amount will not be factored into determining the annual state contribution. This extra money is intended to get the funds to the 100 percent funded goal faster, perhaps by 2040 if not sooner. Fully funded: The new law puts the pension systems on course to be 100 percent funded by 2043, as opposed to the existing law’s goal of 90 percent in 2045. The new law would mean that the state would have enough money set aside to cover all pension benefits both for retirees and active employees.
  13. 13. What other provisions were made? Salary cap: Caps the maximum salary that a public employee can use toward a pension at $109,971. (The cap is adjusted yearly by 3 percent or 1/2 the rate of inflation, whichever is less). NOTE: This cap is already in place for those hired after Jan. 1, 2011. Bean-counter approved: Annual state pension contributions would be based on a system endorsed by pension finance experts. The current system is not.
  14. 14. What other provisions were made? Volunteer 401K-style option: Creates a voluntary plan. Each pension system (TRS, SURS, SERS and GARS) would establish a “defined contribution” plan beginning July 1, 2015. Up to 5 percent of Tier 1 employees (those hired before Jan. 1, 2011) would have the option of leaving the defined benefit pension system for the new plan. NOTE: This provision is revenue neutral for the state. Effective Rate of Interest: Lowers the assumed rate of return used in alternative pension calculations to the interest rate on 30 year Treasury Bonds plus 0.75%. A member's annuity will not be lower than it would have been as of the bill's effective date.
  15. 15. What other provisions were made? Pension abuses: Non-governmental organizations (unions, lobby groups, non-profits) cannot participate in state retirement plans. New hires would not be able to use sick or vacation time toward pensionable salary or years of service when calculating retirement.
  16. 16. How to factor your cost-of-living adjustment in retirement To factor your COLA, you need to know: 1. How many years you worked. 2. What pension system you are in. (TRS-teachers, SURS-university employees, SERS-state government employees) 3. Your annual pension. The formula: Your COLA will be whichever is lower: 3 percent of annual pension or 3 percent of (years of service X either $800 or $1,000 depending on your pension system)
  17. 17. How to factor your cost-of-living adjustment in retirement How it works: You will need to compare two numbers. First, calculate 3 percent of your annual pension (0.03 X pension). Save the number. Next, multiply the number of years you worked by $800 for SERS and by $1,000 for TRS and SURS.* Calculate 3 percent of that total. *TRS and SURS employees do not contribute to and are not eligible for Social Security. Most SERS employees contribute to and are eligible for Social Security in retirement. Those SERS employees who do not contribute to Social Security would use the $1,000 credit. Compare the two numbers (3 percent of pension vs. 3 percent of years x credit) Whichever number is lower is your COLA. NOTE: The $800 and $1,000 credits will adjust annually with inflation.
  18. 18. Examples Example 1. John Doe works 30 years at Department of Natural Resources and retires with a pension of $35,000. He paid into Social Security while working for the state so he uses the $800 credit formula. First calculation: 3 percent of $35,000 (annual pension) is $1,050. Second calculation: 30 years of service X $800 = $24,000 3 percent of $24,000 is $720 The answer: $720 is less than $1,050. John’s COLA is $720. His pension would increase to $35,720.
  19. 19. Examples Example 2. Jane Doe worked 30 years as a teacher in a downstate school district. She retires on a pension of $35,000. Like other TRS members, she did not pay into Social Security while working as a teacher. First calculation: 3 percent of $35,000 (annual pension) is $1,050. Second calculation: 30 years of service X $1,000 = $30,000 3 percent of $30,000 = $900 The answer: $900 is less than $1,050. Jane’s COLA is $900. Her pension would increase to $35,900. NOTE: The following year, these formulas would be repeated but the $800 and $1,000 credits would be adjusted to reflect inflation.
  20. 20. Q&A provided by Illinois Senate Democratic Caucus December 11, 2013