Friday, March 9, 2012

The Effects of HB 5754 and HB 1325 on the Teachers’ Defined-Benefit Pension Plan

Teachers have been excluded from Social Security coverage since the beginning of its enactment in 1935.  (All state and local government employees are excluded). In a report entitled, Mandatory Social Security Cost Study for Illinois Public Education from TRS (April 2007), “mandatory Social Security [as in the case for teachers opting out of the current defined-benefit pension plan for a defined-contribution savings plan or 401 k plan] would have an immediate and ever-increasing impact on Illinois public education. The cost of Social Security and a supplemental retirement plan would be substantially higher than the current defined-benefit plans provided through a combination of state, local, and employee contributions.

“...Mandating participation into the Social Security system would not only jeopardize the integrity of the existing pension plans, but also create uncertainty as to the benefit levels for future members. The most dramatic impact of mandating Social Security [would be] on schools, colleges, and universities… The conversion of existing retirement systems to include Social Security would inevitably reduce funds available for education programs and services… The reductions and cutbacks would be different at every institution, but it is clear that teachers, administrators, and school board members would be forced to make tough choices that would reduce educational opportunities.

“[Furthermore] local government costs would increase (because of the FICA tax) and state costs would decrease (because of lower retirement costs), but the net result would be an increase in total cost. The increase in FICA taxes would be much greater than the reduction in retirement costs under any realistic scenario.

“[Note that] educators would [have to] pay 6.2 percent in FICA taxes, plus a lower member contribution for the lower retirement formula. Assuming the new member contribution is 4.0 percent, educators would be contributing a total of 10.2 percent, somewhat higher than the current 9.4 percent paid by TRS members and the 8.0 percent by SURS members.

“Despite higher net costs for employers/State of Illinois and higher contributions from members, total retirement income with mandatory Social Security would almost certainly be lower than it would be under TRS or SURS alone. The dollars contributed by the employer and by the member to Social Security ‘buy’ lower benefits than the dollars contributed to the retirement systems because Social Security benefits are weighted towards lower income recipients.

“…Social Security participation for future employees of state and local government is one reform that continues to be contested as a solution. [It] would be devastating to Illinois public education. The first-year employer cost of covering newly hired educators would be $57.2 million. The cumulative additional cost would be $893.7 million within the first five years and $3.4 billion within the first 10 years…The additional cost to Illinois public employers for current employees would be $969.8 million. [As stated] public employees would also be paying 6.2 percent if Social Security were already in effect." 

All in all, studies done by TRS have concluded that “the current stand-alone system [a defined-benefit pension plan] better serves Illinois educators and taxpayers...  Diverting revenues from the state and local retirement plans will reduce investment options and may require TRS, SURS, and other retirement systems to make less desirable investment decisions. Ultimately, mandatory Social Security [would] increase taxpayer costs and reduce the availability of ancillary retirement benefits such as cost-of-living adjustments and health insurance… Mandating Social Security would take the control away from local decision makers, driving up the cost of doing business for schools, colleges, and universities and leading to reductions in educational programs” (TRS).

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