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Monday, August 14, 2017
"The Parity Between Contributions and Retirement Benefits/Earnings" in the Teachers' Retirement System of Illinois by John Dillon
“…According to a recent research paper looking at all states, that moment of contributions' and benefits' equivalence may be longer away than any teacher thought, and it will be VERY dependent upon the specific state’s retirement program. Two significant findings occur in this brief, Negative Returns: How State Pensions Shortchange Teachers.
“‘First, in the median state, teachers must serve at least 25 years to receive a pension worth more than their own contributions. Teachers with shorter careers get no school-financed retirement benefit despite their many years of service. They may be better off taking back their own contributions when they quit rather than waiting to collect a pension.
“‘Second, the authors estimate that more than three-quarters of new teachers will earn less in pension benefits than they contributed to the plan. Instead of benefiting from their pension plans, most teachers are net contributors.’
“Why? Because new plans in many states – known in Illinois as Tiers – will push the intersection of contributions and expected retirement earnings far into the future. In Massachusetts, for example, recent changes for new hires have made it IMPOSSIBLE for any of them to ever meet the parity between contributions and retirement benefits/earnings.
“According to the authors, Aldeman and Johnson, Tier I teachers in Illinois can expect to achieve a ‘breaking even’ point after 28 years of teaching.
“The plan for Tier II in Illinois, which passed the General Assembly in less than 24 hours, asked new hires after January of 2011 to pay the same contribution as Tier I for less in retirement benefits: a simple rather than compounded annual cost of living increase, a capped retirement annuity at $112, 408, a retirement age of 67 and with severe deductions for an earlier exit.
“This means that, actuarially, Tier II teachers will need to provide classroom instruction for 35 years before the ‘break-even point’ in deserved benefits…
“Tier III offers some tantalizing differences for the burgled Tier II teachers who are now 6 years into their profession. Tier III will raise their retirement earnings ceiling from $112,000 to $127,000. Contributions for Tier III teachers will be reduced to 6.2% of salary, rather than the 9% they are now paying. And they will be provided a defined contribution (think a 403b), for which they will pay 4% of salary and the local school district will match from 2% - 6%...
“Tier III reduces the multiplier for the final average annuity from 2.2 to 1.25. This means the break-even point will be moved nearly 40% further into the future. What took 28 years or 35 years to make parity will take MUCH longer! Example: Under 1.25, a teacher will be eligible for 50% of a final averaged salary in 40 years! The cap of 75% of earnings in retirement will take the Tier III teacher 60 years of teaching! Start at age 25 and work until 85? The annual cost of living adjustment will no longer contain a 3% simple rate. Retired Tier III teachers will receive only ½ of the CPI, but nothing below zero…”
from Will Your Contributions to TRS Ever Match Your Eventual After-Retirement Earnings? Or When Do I Break Even? Or What Will Tier III Do To Me? by John Dillon