Windfall Elimination Provision and Government Pension Offset

The Windfall Elimination Provision (WEP) “was enacted as part of the 1983 Social Security Refinancing Act, designed to shore up the financing of the Social Security Trust Fund. That Act was signed into law by President Ronald Reagan” (Mass Retirees).  
 

“The Windfall Elimination Provision primarily affects [a public employee who has] earned a pension in any job where [he or she] did not pay Social Security taxes and also worked in other jobs long enough to qualify for a Social Security retirement or disability benefit” (Social Security website).

WEP reduces any earned Social Security in other jobs because of a state pension benefit. “…Reduction in [a] Social Security benefit cannot be more than one-half of the amount of [one’s public] pension that is based on earnings after 1956 on which [he or she] did not pay Social Security taxes…

“The Windfall Elimination Provision may apply if [the public employee reaches 62] after 1985; or [if he or she] became disabled after 1985; and [if he or she] first became eligible for a monthly pension based on work where [he or she] did not pay Social Security taxes after 1985…” (Social Security website).

According to Mass Retirees, “the WEP affects members who apply for their own (not spousal) Social Security benefits and fail to satisfy certain exceptions. A major exception is that members, who were eligible for their public pension before January 1, 1986 (i.e., 20/more years of service under age 55, or 10/more years over 55) or have at least 30 years of substantial coverage under Social Security, are exempt from the WEP. (There is some relief for those with 20-30 years of SS coverage.”

The Government Pension Offset (GPO) is “a provision in the 1977 Social Security Amendments signed into law by President Jimmy Carter” (Mass Retirees).  

“The GPO affects members who apply for Social Security spousal benefits, based upon their husband or wife’s work record under the program and fail to satisfy two exceptions. Members must either be eligible for their public pension before December 1, 1982 and meet all requirements for Social Security spousal benefits… or be eligible for their pension before July 1, 1983 and receiving one-half support from his or her spouse. Unless a member satisfies one of these two exceptions, then the amount of their Social Security spousal benefits will be reduced by two-thirds of their public pension” (Mass Retirees).

“In other words, [with] a monthly civil service pension of $600, two-thirds of that (or $400) must be deducted from Social Security benefits. For example, [if the public employee is eligible] for a $500 spouse’s, widow’s or widower’s benefit from Social Security, [he or she] will receive $100 per month from Social Security ($500 – $400 = $100)” (Social Security Website).   

For more information on WEP and GPO, check the Social Security website:
WEP: http://www.socialsecurity.gov/pubs/10045.pdf
GPO: http://www.socialsecurity.gov/pubs/10007.pdf 

As said by the Illinois Education Association, “nine out of ten public employees affected by the GPO lose their entire spousal benefit, even though their spouse paid Social Security taxes for many years. The WEP causes hard-working people to lose up to sixty percent of the benefits they earned themselves. Many workers rely on misleading Social Security Administration statements that fail to take into account the GPO and WEP when projecting benefits.

“Some 300,000 individuals lose an average of $3,600 a year due to the GPO - an amount that can make the difference between self-sufficiency and poverty. Impacted people have less money to spend in their local economy and sometimes have to turn to expensive government programs like food stamps to make ends meet. Individuals who worked in other careers are less likely to want to become teachers if doing so will mean a loss of earned Social Security benefits. The GPO and WEP are also causing current educators to leave the profession, and students to choose courses of study other than education.

“The GPO and WEP impact government employees and retirees in virtually every state, but their impact is most acute in 15 states: Alaska, California, Colorado, Connecticut, Georgia (certain local governments), Illinois, Louisiana, Kentucky (certain local governments), Maine, Massachusetts, Missouri, Nevada, Ohio, Rhode Island, and Texas. Nationwide, more than one-third of teachers and education employees, and more than one-fifth of other public employees, are not covered by Social Security.

“The GPO affects federal, state, and local government employees – including teachers and other education employees – eligible to retire after December 1982 or later from a job not covered by Social Security. Approximately 305,000 retired federal, state, and local government employees have already been affected by the GPO. Thousands more stand to be affected in the future.”

There is a Senate Bill that has been introduced to repeal Social Security offsets. The National Education Association (NEA) “supports the repeal of unfair offsets – the Government Pension Offset and Windfall Elimination Provision – that unfairly reduce or eliminate Social Security benefits that public employees have EARNED. In December 2011, Senators Kerry (D-MA) and Collins (R-ME) introduced the Senate version of the Social Security Fairness Act (S. 2010), which would repeal the Government Pension Offset and Windfall Elimination Provision. Representatives McKeon (R-CA) and Berman (D-CA) had previously introduced the bill in the House (H.R. 1332). See if your Representative is a cosponser. Take Action Today: Urge your Senators and Representatives to cosponsor the Social Security Fairness Act” (NEA).

Update for WEP & GPO (April 28, 2013): http://teacherpoetmusicianglenbrown.blogspot.com/2013/04/speak-out-for-social-security-fairness.html

Update for WEP & GPO from Mass Retirees (November 15, 2014):

"If passed, H.R. 5697 would repeal the current WEP law and replace it with a new Social Security formula that would apply to all Social Security recipients - both public and private sector. Current retirees, impacted by the WEP, would see their Social Security benefit recalculated. The result would be a restoration of roughly 1/3 of the original WEP reduction.

"'The goal of H.R. 5697 is to create a fair Social Security calculation that accurately reflects the years paid into Social Security vs. the years paid into a pension system outside of Social Security,' explains Association Legislative Liaison Shawn Duhamel. 'If passed into law the benefit change would take effect in 2017, once Social Security launches their new enforcement system that will ensure everyone is collecting the benefit in which they earned.'"

Federal Legislation to Repeal Windfall Elimination Provision (WEP) Introduced November 2014 (Retired State Employees Association of Louisiana):

“H.R. 5697, if passed, would permanently repeal the current Windfall Elimination Provision and replace it with a new and fair formula that treats public servants like the rest of American workers. Guarantee public servants receive the benefits they earned while they paid into Social Security. Reduce the WEP by up to a third for current retirees, and up to half for future retirees – increasing lifetime Social Security benefits by between $20,000 and $32,400 (as estimated by the Social Security actuary). It would not impact the Social Security trust fund.”

Click here for more information.

Update for WEP & GPO from the Retired State Employees Association of Louisiana (May 5, 2015): 

“…U.S. Congressmen Kevin Brady (R-TX) and Richard Neal (D-MA) have co-authored H.R. 711, known as the Equal Treatment of Public Servants Act.  If passed, this federal legislation would repeal the WEP in its current form and enact a new formula which would recognize actual earnings history.  At a recent meeting Ms. Rougeou attended in Washington, D.C., Congressman Brady asserted that the legislation has bipartisan support, is cost neutral, and he believes it has a real chance at passage...” 

Click here for more information.

Update (June 17, 2015):

The Windfall Elimination Provision (WEP) reduces, but does not eliminate, a portion of an individual's Social Security earned from other work outside of his/her public employment.

Congressman Richard Neil (D-MA) and Congressman Kevin Brady (R-TX) are continuing their efforts to pass HR 711, a measure to reform the Social Security Windfall Elimination Provision.   

This measure is continuing to progress slowly through the process and has continued to draw bipartisan support since its introduction in February. The legislation has garnered the support of 27 co-sponsors and has been assigned to the House Ways and Means Committee.

HR 711 proposes to reform the Windfall Elimination Provision by replacing the existing WEP formula, which uses an arbitrary reduction percentage with a formula that takes into account the actual wage history for the public employee. The WEP was enacted in 1983 as part of a large reform package designed to shore up the financing of the Social Security system. 

We are asking retirees to contact their members of Congress and ask them to co-sponsor HR 711. To log in and send your message, please Click Here. [This link has been deactivated... Not sure why. Contact the IRTA].

Updated (June 29, 2015)

Dear Mr. Brown:

Thank you for contacting me to voice your support for repealing the Windfall Elimination and Government Pension Offset Provisions in current law. I appreciate your active participation in our legislative process. Your involvement helps me more effectively represent you and the Eleventh District of Illinois.

I agree with you, and you will be pleased to know that after hearing form constituents such as yourself I joined as a co-sponsor of H.R.973, the Social Security Fairness Act of 2015. Introduced on February 13th, 2015, by my colleague Congressman Rodney Davis (R-IL), this measure would repeal the government pension offset requirements for Social Security that apply to the insurance benefits of spouses, widows and widowers, and mothers and fathers. The bill would also repeal windfall elimination requirements used to calculate an individual’s primary insurance amount under Social Security.

As you know, when Social Security was first created, public employees were intentionally excluded because they already had pension programs in place. Unfortunately, this rule has resulted in millions of hardworking public employees and their families being penalized when they retire. H.R.973 has been referred to the House Committee on Ways and Means. Please know that as a co-sponsor of this bill, I plan to vote for it if I have the opportunity to do so in the House of Representatives.

I apologize for the delay in responding to your concerns. It is my policy to respond to every one of the thousands of emails, faxes and letters I receive each month. Hearing from the people I serve is vital to doing my job right. Thank you again for taking the time to share your concerns and I hope you keep in touch with me on this or any other issue you feel important. To stay informed of my work, or to sign up for my electronic newsletters, please visit my website at http://foster.house.gov. It is an honor to represent you.

Sincerely,

Bill Foster

Member of Congress

For a promise that Obama did not keep, click here. 


Updated (February 24, 2016)

“There is a lot of talk about expanding and improving Social Security, but no one is saying anything about getting rid of the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP). Despite the repeal bills currently in Congress, (H.R.973 and S.1651), there is nothing being said about how badly these offsets affect the FULLY-EARNED benefits of retired public employees...

“GPO—At least 615,000 retirees are affected by the GPO; 74% of those affected have lost ALL their Social Security retirement benefits; 81% of those affected are women. Women affected by the GPO have lower pensions than men… The GPO is a direct attack against families.  Parents who stay home and care for children usually lose all their spousal benefits, and they often don’t get any survivor benefits as well.

“WEP—More than 1.5 million people are affected by the WEP. It harms low-income retirees more than those with larger pensions. Everyone knows that the formula and premise are wrong.  People are punished by not earning Social Security in their work as public servants, and then they are punished again when they retire by losing what they had already earned in other work (Congressional Research Report).

“THE COST TO REPEAL BOTH OFFSETS WOULD BE LESS THAN 2% OF WHAT IS PAID OUT TO OTHER RETIREES IN SOCIAL SECURITY BENEFITS!

“Below is a list of addresses. Please MAIL each of these organizations a personal message or email them from the links below…”

AARP
National Policy Council
Association of Retired Americans
601 E Street, NW
Washington, D.C. 20049
member@aarp.org

AARP has a National Policy Council that makes decisions about what legislation to support. They used to be against repeal. We helped them change their position. They are currently neutral about the offsets. They need to know more. They need to know how the offsets affect retirees. YOU can be a member of the National Policy Council! Go to aarp.org/npc and apply by February 28.

Social Security Works
Nancy Altman
Social Security Works
815 16th St NW Fourth Floor
Washington, DC 20006
www.socialsecurityworks.org
Social Security Works is an activist group supported by a number of unions. They have not paid attention to our issue. They need to know more about GPO/WEP and what happens to us.

National Committee to Preserve Social Security & Medicare

Max Richtman, President
NCPSSM
10 G Street NE Suite 600
Washington DC 20002
 800.966.1935
www.ncpssm.org
This group has studied the GPO and WEP and has endorsed the current repeal bills. Thank them and let them know how you have been affected.

Alliance for Retired Americans

Richard Fiesta, Executive Director
Alliance for Retired Americans
815 16th St., N.W., 4th floor
Washington, D.C., 20006
retiredamericans.org/contact-us
This is a group of active seniors who have ratified a resolution to support the repeal of the offsets. They need to know how the offsets have affected you. Please encourage them to do more!

Older Women’s League OWL

Margaret Hellie Huyck, President
Older Women’s League
1627 Eye St., N.W. Suite 600
Washington, D.C. 20006

info@owl-national.org
This group is particularly interested in issues affecting older women. They have been understanding, but they need to hear more stories.

American Association of University Women
Patricia Fae Ho, Board Chair
AAUW
1111 Sixteenth St. NW
Washington, DC 20036
202.785.7700   800.326.2289

connect@aauw.org
You can write the Board of Directors from this link:
http://www.aauw.org/who-we-are/leadership-and-staff/board-of-directors/

If you belong to another group that should be supporting this cause, please let us know at ssfairness@gmail.com . You can also respond on the Social Security Fairness blog: click here. Thank you!

For additional information, click on the GPO/WEP icon under this blog's masthead.

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).

The Hybrid Pension Scheme and Four Important Issues

Hybrids are pension schemes where the state and the employee both contribute simultaneously to a defined-benefit pension plan and to a defined-contribution savings plan or 401 (k) plan. State employers would have to match the employees’ contributions, though there would be a contributory limitation.  

In effect, the defined-benefit pension plan has always acted as the “Social Security” alternative for Illinois teachers. Teachers do not pay into the Social Security system because the State of Illinois opted out of that arrangement years ago to save money. The defined-contribution savings scheme, as part of a hybrid plan, would offer an opportunity for savings beyond the existing capped defined-benefit for teachers who began their career in January 2011 (SB 1946, April 2010).

The recently proposed HB 5754 in February 2012—a bill regarding defined-contribution or “self-managed” plans (401 k)—applies to all public pension systems and their “current” members. HB 5754 is not a bill for a hybrid plan. It’s a bill for opting out of a guaranteed defined-benefit pension plan.

Undeniably, though hybrid plans would include a partial guaranteed annuity because of their component part—the defined-benefit pension plan—and would be a much better choice than having only a 401 (k) plan, hybrid plans would induce legal and regulatory questions, some of which might include whether these defined-contribution savings plans would be covered by the Pension Benefit Guaranty Corporation, whether there would be a pay credit formula in place for these plans based upon the employee’s age and service, and whether there would be a minimum interest credit rate tied to long-term bonds (30-year Treasury yield) without risk to principal.

What would be essential for state employees before choosing a hybrid pension plan is relevant and clear information (full disclosure) regarding its cost and consequences.  As stated, there is an incomplete guarantee with a hybrid plan. What must also be considered is the precarious part of the hybrid-plan equation, in other words, the defined-contribution’s investment of assets, its expenditures and its legality.

Hybrid pension plans are as effective as the competence of their trustees and the regulation and complex structure of such schemes. It would entail proficient knowledge of their funding standards.  Note that hybrid pension plans would not take into account the longevity risks for retiring teachers, unlike a defined-benefit pension plan. It is important to perceive that hybrid plans (and defined-contribution savings plans by themselves) are not definitive solutions for the apparent state’s budget problems.

What remains a critical issue is that redistributing the funding burden to the state’s school districts and to their teachers and property taxpayers is unreasonable and unwarranted, and that legislators bear in mind that offering a fair and sustainable pension plan for teachers is a priority, not only for teachers but for the public school districts in Illinois. What is also at stake here is whether “the best and brightest” possible teaching candidates become one of the state’s exigencies. The state will not attract or retain the “best” teaching aspirants without offering an equitable and solvent defined-benefit pension plan for them. Finally, what continues to be most crucial for all of us is that policymakers in Illinois guarantee a minimum level of payment to the public pension systems and pay the unfunded liability, thus, upholding the state’s constitutional obligation while maintaining their legal and moral responsibility.

See "Pension Hybrid Plans, Constitutional Challenges, and the Ethical Path to Take"
See also "Defined-Benefit Pension Plan v. Defined-Contribution Savings Plan"

Governor Quinn’s Proposal Will Somersault TRIP

Sure, let’s take away $87 million from the retired teachers of Illinois, and then let’s give that money away perhaps to more corporations as a gift from the governor.  a retired teacher pays a total of $170 to $650 a month for health insurance, depending on the type of coverage the retiree selects and whether he or she qualifies for Medicare, said Jim Bachman, executive director of the Illinois Retired Teachers Association.Sure, let’s increase those premiums for teachers.  Better yet, let’s place the burden on the school districts in Illinois and their local taxpayers, no matter how badly funded the school districts already are.  
 

a retired teacher pays a total of $170 to $650 a month for health insurance, depending on the type of coverage the retiree selects and whether he or she qualifies for Medicare, said Jim Bachman, executive director of the Illinois Retired Teachers Association.a retired teacher pays a total of $170 to $650 a month for health insurance, depending on the type of coverage the retiree selects and whether he or she qualifies for Medicare, said Jim Bachman, executive director of the Illinois Retired Teachers Association.As stated by Jim Bachman, executive director of the Illinois Retired Teachers’ Association, “a retired teacher pays a total of $170 to $650 a month for health insurance, depending on the type of coverage the retiree selects and whether he or she qualifies for Medicare” (Doug Finke, The State Journal Register 25 February 2012). 

“Active members pay 0.88 percent of their salary; the state matches the active teacher’s contributions ($87 million for FY12); school districts contribute 0.66 percent of their payroll, and (65,000) retirees (who depend on this insurance program) pay their health insurance premiums” (Illinois Education Association, IEA).

According to Bob Haisman, a past president of IEA, for his 2013 budget, Governor Quinn has proposed to "zero out" the state's contribution to the Teachers' Retired Insurance Program (TRIP).  Without warning, Governor Quinn has unilaterally proposed to slash state support. Governor Quinn is breaking the state's promise to the men and women who spent their lives teaching the children of Illinois.  Tell Governor Quinn this is not the way to support our teachers, who have supported him.

Please sign this petition:

http://signon.org/sign/governor-quinn-do-not?source=s.fwd&r_by=2770571

Understanding Illinois’ Budget Deficit and Solutions

·         According to the Commission on Government Forecasting and Accountability (June 2011), besides federal sources of income, the state uses only eleven sources of revenue: personal income tax (but note that Illinois was tied for the fourth lowest individual tax rate on households in the top income bracket), corporate income tax (remember the recent extortionate tax breaks given to Illinois corporations?), corporate franchise tax and fees, public utility taxes, vehicle use tax, inheritance tax, insurance taxes and fees, cigarette taxes, liquor taxes, miscellaneous tax sources, and sales tax (though Illinois does not tax services like most other states for a significant source of revenue).

·         As stated by the Center on Budget and Policy Priorities (CBPP July 2009), “a majority of states apply their sales tax to less than one-third of 168 potentially-taxable services… [States that do not tax services, such as Illinois], probably could increase [its] sales tax revenue by more than one-third if [it] taxed services purchased by households comprehensively… Five of the 45 states with sales taxes impose them on fewer than 20 services… Research finds that purchases of some services do not fall as precipitously as durable goods purchases do when the economy slows nor rise as rapidly when the economy is booming.”

·         Consider the fact that a broader-based taxation system would provide a decrease in taxes for low-income and many middle-income families. Taxing services alone “would generate enough revenue to stabilize the General Revenue Fund and prevent structural deficits that lead to cuts in basic needs and social service programs” (the Center for Tax and Budget Accountability).

·         The Chicago Metropolitan Agency for Planning (CMAP, July 2011) argues that the tax system in Illinois and most other states do not reflect today’s economic realities.  In the last several decades, the U.S. economy has slowly shifted from manufacturing industries to a “services and information-based economy... Since the early 1970s, spending on services has exceeded spending on goods…

·         “In 2010, consumers spent twice as much on services (66.9 percent of total personal consumption expenditures) as on goods (33.1 percent of total personal consumption expenditures).  This shift in the fundamentals of the economy has changed the relationship between consumption and tax revenue…  Changes in personal consumption have resulted in the Illinois sales tax covering a decreasing proportion of consumption expenditures” (CMAP).

·         The Chicago Metropolitan Agency for Planning also contends that the tax system in Illinois is inefficient.  “The tax system itself is influencing economic activity” by taxing goods that are consumed rather than the consumption of resources.   Furthermore, the tax system is also inequitable because “lower-income taxpayers typically spend a higher percentage of their income on tangible goods than higher-income people.”  

·         According to United for a Fair Economy, “at the core of the budget ‘crisis’ facing [Illinois] is [its] regressive state tax structure… that is, low-and-middle-income families pay a greater share of their income in taxes than the wealthy… [A regressive tax] disproportionately impacts low-income people because, unlike the wealthy, [low-income people] are forced to spend a majority of their income purchasing basic needs that are subject to sales taxes.”

·         Likewise, the Institute on Taxation and Economic Policy (November 2009) claims that the State of Illinois does not tax equitably, and it is in the top ten of regressive state tax systems where the wealthiest taxpayers do not pay as much of their incomes in taxes as the poorest and middle-income wage earners.   

·         The Institute on Taxation and Economic Policy (ITEP) further maintains that the top 5 percent of income earners in Illinois pay the least amount of sales, excise, property, and income taxes because of federal deduction offsets or substantial tax savings (regressive tax loopholes) from itemized deductions, such as capital gains tax breaks and deductions for federal income taxes paid that are coupled with a flat-rate structure.  “Since the rich are able to save a much larger share of their incomes than middle-income families – and since the poor rarely save at all – the taxes are inherently regressive” (ITEP).

·         Illinois income tax uses a single rate structure that results in low-income wage earners paying more taxes than the wealthy.   As said by the Institute of Taxation and Economic Policy, Illinois is among ten states in the nation with the highest taxes paid by its poorest citizens at 13 percent. 

·         In 2007, the top one percent of wage earners in the U.S. (with an average income of just under $2 million a year) paid 6.4 percent in total taxes while the bottom 20 percent of wage earners (with an average income of just under $11 thousand a year) paid 10.9 percent in taxes (ITEP).   

·         The Center for Tax and Budget Accountability (CTBA February 2012) asserts that “given the current economic context, now is precisely the right time to increase tax revenue with a graduated income tax focused primarily on the top ten percent of income earners, as opposed to reducing the state’s budget deficit through significant service cuts [which include retirees’ healthcare and radical pension “reform”]…

·         “Given an appropriately designed graduated-rate structure, Illinois could cut the overall state income tax burden for 94 percent of all taxpayers—on average providing a tax cut to every taxpayer with less than $150,000 in base income annually, raise at least $2.4 billion more in revenue, and keep the effective individual income tax rate for millionaires well below five percent…  Illinois taxpayers with the bottom 94 percent of base income collectively would receive an annual tax cut of $1.06 billion… [T]he combined effect of this policy would be a stimulus to the economy from tax cuts and additional state spending (assuming that the additional revenue is used to fund current public services that would otherwise not be funded) that would create at least 36,000 private sector jobs in communities across Illinois…

·         “Most taxes imposed by state and local government, like sales, excise and property, are inherently regressive, that is, [they] take a greater share of the earnings from low-to-moderate income families than from affluent families.  Creating a graduated-rate structure for the Illinois income tax is one of the few strategies available to counteract the natural [regressive results] of most taxes. Illinois is denied this fundamental tax fairness tool by the state constitution [Article IX, Section 3(a)] that requires one flat income tax rate for all taxpayers…” (CTBA).

·         Indeed, solutions to the state’s budget deficit include increasing the state’s revenue sources by changing the current individual income tax to a progressive or graduated income tax; broadening the state’s tax base; taxing services; increasing taxation on “undesirable habits” like gambling, cigarettes and alcohol; implementing a more timely system of payments; eliminating unnecessary tax breaks and loopholes for corporations; increasing taxation on the wealthy to achieve fairness, and examining and improving the efficiency of the state’s government. 

·         Considering their spring legislative focus, it is apparent that many legislators are not contemplating today’s economic realities: Illinois’ economy has largely become a “services and information-based economy… [and that] changes in personal consumption have resulted in the Illinois sales tax covering a decreasing proportion of consumption expenditures” (Chicago Metropolitan Agency for Planning, July 2011).

·         These same legislators, et al. also ignore the fact that Illinois “suffers from structural deficits or from failure of revenues to grow quickly as the cost of services…, [and that] structural deficits stem largely from out-of-date tax systems, coupled with costs that rise faster than the economy… Fixing these structural problems would help [Illinois] balance [its] operating budgets without resorting to [a reckless and radical “pension reform” instigated and propagandized by the Civic Committee of the Commercial Club of Chicago, the Civic Federation, Illinois Policy Institute, Chicago Tribune and their ilk]” (The Center on Budget and Policy Priorities, January 2011).

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 39^th 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.