SB 512 & Money Purchase Option (Update)

Money Purchase Benefits or Purchase Benefit Options are a calculation based upon actuarial determiners as to the amount of money a retiree from TRS deserves after so many years of service. When an individual meets with a TRS advisor to calculate what annual annuity amount he or she will collect after “X” years of service, the TRS advisor will usually provide that figure based upon the number of years (times a calculation of 2.2 percent of his or her final average salary for each year of service and up to a maximum of 75 percent of the final average salary). The average of the highest four years’ service in the last ten years is used for the calculation.

However, if the employee began working before June of 2005, another calculation may be used based upon the person’s contributions plus interest and the employer’s contribution. Note that the retiree is given the higher of the two estimates.

According to David Urbanek, TRS Public Information Officer, “Your contributions will be accumulating in your account faster at a higher rate than under the old law. When the time comes to calculate, more people will have a higher pension. That is the biggest driver of the increased cost to the state” (Wetterich, Northwest Herald, November 6, 2011).

If there is an attempt to eliminate the money purchase option, Urbanek states that it will “create the same legal questions that [SB 512] has had since its inception. Senate Bill 512 wasn’t written with regard to other laws. SB 512 gives every member a choice of what contribution rate he or she is going to pay. That’s against IRS rules” (Wetterich).

SB 512 will have current teachers pay increasing contributions – as written now – moving from 9.4% to 13.77% and so on, to perhaps as high as 20% in the next 15 years. According to Dick Ingram, Executive Director of TRS, those individuals who qualify and decide to remain in the Tier One Pension Plan and absorb the increased rates may see returns at retirement nearly 50 – 75% beyond what they might have expected otherwise.

Note that while the Civic Committee of the Commercial Club of Chicago pushes the General Assembly to “do something” radical to thwart the pension systems and the public unions, the Civic Committee has designed a “quick-fix” bill that could cost the state even more:

“The bill could cost the state an additional $62 billion through 2045; employee pension contributions might no longer be taken out of their paychecks before federal taxes are deducted, and teachers who opt for a defined-contribution plan may be forced into the federal Social Security system, which would [increase the] cost [for] cash-strapped school districts” (Wetterich).