Teacher-retirement systems are supposed to provide a measure of security in exchange for years of service. But for new teachers in Illinois, that’s looking increasingly unlikely.
Nearly a quarter of newly hired teachers will never vest in the state’s Teacher Retirement System, a new analysis says. What’s more, three quarters won’t even make back what they pay into the system.
Those statistics are the result of changes made by lawmakers in 2011 to scale back costs, according to the analysis, by Bellwether Education Partners, a Washington-based consulting firm.
For new teachers worried about the state of their future finances, the question might be: Is anybody in the state legislature listening?
The short answer, observers say, is probably not. Current pension-policy efforts in the state are focused chiefly on the problem that the teacher-pension system remains more than $65 billion in debt.
Though there’s a growing awareness of the challenges the pension situation poses for new teachers, “nobody is really thinking about what the long-term impacts are in terms of retention,” said Kent Redfield, a professor emeritus of public policy at the University of Illinois at Springfield.
“Public policy arguments and long-term effects are probably not going to drive the discussion of pension systems in the short term,” he said.
Scaling Back Benefits
Years of underfunding have left the Illinois teacher-pension system in the worst financial shape in the nation. It is only 41.5 percent funded, a liability that has compounded the state’s debts by contributing to lower credit scores and growing interest costs.
But the state is also constrained in what it can do to pare back its pension debts. A series of benefit reductions signed into law in 2013 were thrown out by the state supreme court last year.
A parallel reform effort, begun in 2011, put all new teacher hires on a “Tier II” plan with significantly less generous benefits than previously offered. It takes them longer to vest in the new plan—10 years rather than five—and they have to work until at least age 67 to be eligible for retirement, up from as young as 55 under the prior system.
So steep are the scale-backs that without adjustments, the Tier II plan could by 2027 fall afoul of federal rules requiring benefits to be at least as good the minimum benefit promised to workers under Social Security, according to news reports. (Most Illinois public employees do not participate in Social Security.)
The Bellwether analysis calculates that under the Tier II formula, teachers would need to work 26 years to “break even” on their contributions. And 78 percent of teachers will leave teaching before that.
Ultimately, that not only puts teachers’ financial futures at risk, but it also could have long-term effects on whether the state can ensure a sufficient, stable teaching force, said Leslie Kan, a policy analyst at Bellwether.
“It makes it a very precarious situation,” Kan said. “The state wants to have a robust teaching workforce but they’re reaching a point where teachers are going to push back.”
The Illinois Education Association declined a request to comment on the Bellwether report.
Gov. Bruce Rauner, who has in the past floated the idea of putting veteran teachers onto a plan similar to Tier II, has been unable to reach a budget agreement with Democratic lawmakers, hampering attempts to crack the pensions nut this year.
Though he and Illinois Senate President John Cullerton, a Democrat, tentatively agreed to a plan last month to curb public employees’ cost-of-living or pensionable salary raises, it has been railroaded by a disagreement over unions’ collective bargaining rights.
Though involving a distinct retirement system, pension costs have also played a central role in the recent contract disputes between the cash-strapped Chicago district and the Chicago Teachers’ Union.
Cash-Balance Solution?
But some policy analysts say that states like Illinois can fix their pension systems without necessarily having to shortchange newer teachers’ financial futures.
Both the report from Bellwether—generally seen as a proponent of pension-policy changes—and a separate one by the Urban Institute in 2015 propose shifting from defined-benefit pension plans to hybrid, “cash balance” plans. Like a traditional pension system, such plans would guarantee fixed returns, and contributions would be pooled and managed externally. But as with a 401(k), teachers would not have to vest in a plan and could take their investments if they left teaching.
The analysts argue that cash-balance plans would be far better for Illinois teachers who don’t stay in the profession for decades—though they would be less lucrative than the Tier II plan for teachers who do fulfill 37 or more years.
Such plans could also guard against future underfunding since they tie benefits to contributions.
But cash-balance plans have not been tried at scale for teachers, so research on them is limited.
Kansas, Kentucky, Nebraska, and Texas now use a cash-balance plan for some public workers. California offers an optional cash-balance plan for part-time and adjunct teachers.
In Illinois, Sen. Daniel Biss introduced legislation to authorize a cash-balance plan for public employees in 2012. But the legislation went nowhere, and Biss has no plans to revisit the issue anytime soon, a staffer from his office said via email.
The Joyce Foundation funded the Bellwether analysis. (The Joyce Foundation also provides funding to support coverage of the teaching profession in Education Week.)
