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Thursday, March 1, 2012
Guarantees & Sustainability of the Teachers’ Retirement System, Defined-Benefit Pension Plan v. Defined-Contribution "Savings" Plan
I. Constitutional Guarantees:
· Article XIII, Sec. 5 of the Illinois Constitution – “Membership in any pension or retirement system of the State… shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
· Article I, Sec. 16 of the Illinois Constitution – “No ex post facto law, or law impairing the obligation of contracts… shall be passed.”
· Article I, Sec. 10 of the United States Constitution – “No State shall…pass any ex post facto Law, or Law impairing the Obligation of Contracts…”
· Preamble to the Universal Declaration of Human Rights – “Human rights should be protected by the rule of law.”
II. Sustainability of the Teachers’ Retirement System:
· As markets and economy improve, so do the assets in the pension funds. “Since June 30, 2009, a date in which many recent studies on the financial condition of State pension trusts are based, investment returns have rebounded sharply – nearly 25% higher since then” (National Association of State Retirement Administrators, NASRA).
· “State and local retirement trusts accumulate and pay out assets over decades, and as such, have an extended investment horizon” (NASRA).
· According to Dave Urbanek (Public Information Officer for TRS), “pensions will not run out of money… [That] assumes that at a future date, state pensions will just cease and all outstanding financial obligations will come due… Unlike a corporation, a state government cannot go out of business…
· “[Accordingly,] state law empowers TRS (40 ILCS 5/16-158c)… Payment of the required State contributions and of all pensions, retirement annuities, death benefits…, all other benefits…, and all expenses are obligations of the State… The State has waved its sovereign immunity in regard to the teachers’ pension because TRS is a qualified pension plan under the tax-deferred provisions of the IRS code. Federal law would protect all claims…
· “Pensions [are not] the problem [or] why Illinois has been unable to pay its bills. The reason is a dramatic fall-off in State revenues over the last four years, costing the State $4.4 billion…”
· Despite the State’s lost revenue, “in fiscal year 2011, TRS recorded a 23.6 percent rate of return after all fees had been subtracted and generated $7.2 billion in investment income during the year. At the end of FY 2011, total assets stood at $37.7 billion… The TRS average investment return for a 25-year period ending in FY 2010 was 8.6 percent. The average TRS investment return for the 30-year period between 1981 and 2011 was 9.3 percent” (TRS).
· “Both rates beat the System’s assumed long-term rate of return of 8.5 percent. Data compiled by the System’s independent investment consultant over multiple time periods beyond the decade being studied by TRS shows that the System’s investment performance ranks highly among similar public pension funds” (TRS).
· As stated by Dave Urbanek, “TRS has survived for more than 70 years – because over the long term, the System’s income and accumulated assets continue to be greater than what are required to pay out in any given year… The only way TRS [will run] out of money is if income from all sources – teachers, school districts, investments and the State – dries up for a lengthy period of time. Not just one or two sources, but all sources…
· “Even under the accounting and actuarial definition of ‘full funding,’ (70 percent or 80 percent of total long-term liabilities, depending on who you ask), the [TRS] system would still carry a real unfunded liability of several billion dollars… Full funding would be necessary if, at some point in time, TRS needed to pay everyone it owed all the money due them. But that can’t happen under the way the System is structured [because] TRS is a perpetual government agency…”
III. What Defined-Benefit Pension Plans Contribute to a State's Economy:
· Defined-benefit pension plans have an economic impact of several hundred billion dollars each year and support several million American workers in their jobs; they contribute over a hundred billion dollars to annual local, state, and federal revenue, while reducing government expenditures; they also provide capital to the financial markets, and they deliver the same level of retirement income as an individual 401(k) type savings account at half the cost as a result of their professional asset management and better long-term investment strategies, particularly during challenging economic times (The National Institute on Retirement Security, NIRS).
· Defined-benefit pension plans are associated with far fewer American households that experience food privation, shelter adversity, and health care hardship and provide a bastion of hope and financial stability for millions of people in this country (NIRS). Instead of attempting to eliminate defined-benefit pension plans, they should be advocated by everyone.
· It is also true that state-funded pension plans are less expensive for Illinois taxpayers than Social Security and that Illinois taxpayers save hundreds of millions of dollars per year by not paying Social Security payroll taxes for 78% of all active employees in the five-State-managed plans.
· Defined-benefit pension plans have an economic impact of over $4 billion in the State of Illinois; their effect on Gross Domestic Product creates $2.38 billion; jobs created as a result of their existence: 30,448 (TRS).
· Defined-benefit pension plans contribute over $100 billion to annual local, state, and federal revenue in the U.S. and provide capital to financial markets (NIRS).
IV. Why Teachers Prefer a Defined-Benefit Pension Plan Instead of a Defined-Contribution “Savings” Plan:
· A defined-benefit pension plan is more cost efficient than the defined-contribution plan; the state is responsible for funding, investment, inflationary and longevity risks.
· A defined-benefit pension plan offers the retiree predictability; it guarantees monthly benefits for life.
· Funds are invested by professional asset managers in a diversified portfolio that follows long-term investment strategies; the large-pooled assets reduce asset management and miscellaneous fees.
· Consider that the Teachers Retirement System of Illinois is the 39th largest in the U.S. with 378,288 members; the average investment returns for TRS were 9.3% (over 30 years), 8.8% (over 25 years), and 8.3% (over 20 years) (TRS).
· A defined-benefit pension plan provides spousal (survivor) financial benefits and disability benefits.
· A defined-benefit pension plan is a more effective protection than the defined-contribution “savings” plan because it provides self-sufficiency in retirement; it is associated with far fewer households that experience food privation, shelter adversity and health care hardship.
· With a defined-contribution “savings” plan (401(k), 403(b), 457), only contributions are defined.
· The benefit is based upon individual investment earnings; the employee assumes all funding, investment, inflationary and longevity risks.
· A defined-contribution “savings” plan does not have the pooled investments, professional asset managers, and shared administrative costs that a defined-benefit pension plan provides.
· There are no survivor or disability benefits; the defined-contribution “savings” plan is not guaranteed for life, and teachers do not pay into the Social Security System.