Thursday, May 30, 2013

A TRS actuarial study reveals SB 1 Would Create Social Security Chaos; Force Property Tax Hikes

Madigan's SB 1: Social Security Chaos, Property Tax Hikes

An actuarial analysis of Senate Bill 1 shows the bill would create Social Security chaos, eventually leading to massive local property tax hikes and making the proposal an unfunded mandate of historic proportions.

The problems relate to the benefit changes affecting “Tier 1” employees, i.e., those hired prior to January 1, 2011. The “Tier 2” benefit structure for employees hired after that date already faces problems because the benefit is worth less than employees are paying for it. Tier 2 is a looming issue that must be resolved, but SB 1 would create the same problem for the Teachers’ Retirement System (TRS) and, likely, the State Universities Retirement System (SURS).

According to the TRS actuaries’ analysis of SB 1,”[T]he current proposal [SB 1]…creates a Social Security compliance issue for Tier 1 in addition to the existing issues for Tier 2.” In other words, Illinois’ school districts would eventually begin paying the 6.2% employer portion of Social Security taxes. This is because TRS – and, very likely, SURS – would fail to qualify to be exempt from Social Security. Teachers, or 80% of Illinois public employees, are not currently eligible for Social Security, thus saving the state billions of dollars.

Given already tight budgets, this represents a huge unfunded mandate thrust upon school districts – perhaps the largest ever. School districts would endure a huge TRS pension cost-shift – far from paying nothing under a cost-shift, as [Nekritz and Senger] have claimed. Property taxpayers would almost certainly be asked to pick up the tab through new levies.

The analysis further states that “SB 1 provisions result in Tier 1 and Tier 2 members paying for more than the cost of their benefits.”

"A vote for Senate Bill 1 is a vote to raise taxes, violate the law, and go to unnecessary extremes to hurt working families," Dan Montgomery, president of the Illinois Federation of Teachers said. "And it takes a certain kind of audacity to force workers to pay more than their pension is worth and create a system that penalizes members for being a part of it."

The TRS actuarial study is available at the following link: SB 1 as amended May 1, 2013 (House Amendments 1 & 3) Comparison of Contributions and Actuarial Accrued Liability

For additional information, read John Dillon's recent analysis of this fiascoClick Here.

An Update:
SB1 Analysis from Dick Ingram, Executive Director of TRS

As you know we delivered analysis on Monday showing that SB1 would save the state some $130B in contributions over the next 30 years.  That analysis included a note pointing out that SB1 would also create a future issue, similar to what exists today with Tier II, as to whether the TRS benefit would be adequate as a replacement for Social Security. 

As we have said all along regarding Tier II, the fix for this future issue is simple.  All it requires is to have pensionable wages track with the Social Security Wage Base.  Under the proposal they would only increase from the current wage base by one half of the rate of inflation, setting up the future problem.

Since there have been so many questions on this from media, legislators and their staff and others, we asked Buck Consultants to estimate what the “give back” in savings would be if the proposal was changed to have Tier I pensionable wages follow the Social Security Wage Base.  While not having the time for a full analysis, Buck’s estimate is that this would reduce the originally calculated savings over 30 years by between $6B and $7B.

We had also been asked what the savings “given back” would be if the COLA-eligible  benefit cap of $1000 per year of service would be if that were indexed to inflation rather than remain static at $1000 per year of service.  The cost of that change would be between $8B and $9B over 30 years.

I thought this information would be of interest to you as you digest the news over the last days of the session.

--Dick Ingram

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