Friday, September 15, 2017

“Any buyout whether it be full or partial, at retirement or before, rolled over into an IRA or used to purchase an annuity is a reduction in the guaranteed benefit that the member may have earned up to the point of the buyout”—TRS Executive Director Dick Ingram

“State Rep Scott Drury's pension plan is to offer current retirees a buy-out for 70 cents on the dollar. He says he would expect 25 to 30% of current retired teachers would take the deal. I said why would someone take a deal that would give them less money unless they were afraid that the system would go under? He agreed. I told him that to come up with a policy based on fear that takes money from the elderly and retirees to save the state money was immoral. And that he was immoral. Or maybe I said amoral. He shook my hand and told me that we agreed to disagree. I hate it when someone says that to me”—Fred Klonsky.

TRS Executive Director Dick Ingram told legislators in March 2016 that a “buyout” is a benefit cut that would “do little or nothing” to improve the financial health of TRS: 

“…[I]t must be stated that any buyout – whether it be full or partial, at retirement or before, rolled over into an IRA or used to purchase an annuity – is a reduction in the guaranteed benefit that the member may have earned up to the point of the buyout. You won’t see any significant relief for the unfunded burden we already have created. In fact, the buyouts may actually serve to accelerate the state’s pension obligations…


“While the proposals may have a certain appeal to some, and potentially positive perceived benefits, we should study carefully as to whether we might expect any significant benefit from them. [One] can see few instances where prudent financial considerations would lead a member to take a reduction in a benefit that has been guaranteed by the Illinois Constitution and reaffirmed by the Supreme Court. Such instances would be rare and likely due to unusual personal circumstances. They will likely often reflect what is termed adverse selection. 

“An example would be a member who has a terminal illness and who can determine that the lump sum will provide a bigger payout than the monthly benefit. Further, accepting a buyout would place the members' assets subject to the well documented reality that individuals personally managing their retirement money in an IRA or defined contribution account do so with lower average annual investment returns and higher costs than when their assets are managed professionally in a pooled defined benefit plan that shares risks and rewards.

“Some have pointed out that an individual account can be willed to your heirs when you die. That is true but when that happens it means you have... died early… Note that the survivor benefit available to a member of TRS allows them to provide for their beneficiary after they die. While not exactly analogous to the passing on of an asset like the remaining balance of an IRA, it is a significant value when a member is planning for the financial security of their loved ones after they die.

“Others have stated that having control over their assets after a buyout would provide a member some financial flexibility. True again, but this is flexibility that many if not most of our members would likely not need. It would also subject the funds to the risk of being diverted to some non-retirement use. Their TRS benefit is the core element of their retirement security. They are teachers who have planned their retirement relying on a defined benefit that is designed to replace roughly 75 percent of their full-career, pre-retirement earnings. This is exactly what most financial planners suggest is prudent.

“While they may supplement their defined benefit with personal savings in some manner, they have not earned any Social Security benefits that provide a retirement safety net for most of their friends and neighbors. They need the security of a regular monthly check that their TRS defined benefit delivers…” 

Tomorrow's post will address this issue: Can the TRS system "go under?"

1 comment:

  1. “...The truth is this: the concept of a do-it-yourself retirement was a fraud. It was a fraud because to expect people to save up enough money to see themselves through a 20- or 30-year retirement was a dubious proposition in the best of circumstances. It was a fraud because it allowed hustlers in the financial sector to prey on ordinary people with little knowledge of sophisticated financial instruments and schemes...

    “And it was a fraud because the mainstream media, which increasingly relies on the advertising dollars of the personal finance industry, sold expensive lies to an unsuspecting public. When combined with stagnating salaries, rising expenses and a stock market that did not perform like Rumpelstiltskin and spin straw into gold, do-it-yourself retirement was all but guaranteed to lead future generations of Americans to a financially insecure old age. And so it has...”

    Helaine Olen is the author of "Pound Foolish: Exposing the Dark Side of the Personal Finance Industry" and writes The Money Blog for The Guardian.