Relatively Random Teacher Thoughts
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TRS Info - Over a year later
The spark that lead to the research:
A close friend of mine and I were sitting watching March Madness at a local watering hole. We often debate political and social riddles that simply appear to make no sense. It is amazing as the rest of the conversation is so clear but I have no recollection of how this conversation started but once it began it dominated the table for longer than the others present ever would have wanted. The questions and the debate caused me to seek answers and to try to understand how the teacher pension plan works. We debated the feasibility of the pension plan and in the following days I poured myself into research - and this is what I have found:
Teacher’s Retirement System – TRS – Retirement Security for Illinois Educators
The "Teachers Retirement System of The State of Illinois (TRS) is a public pension benefit plan that provides retirement, disability, and survivor benefits for Illinois public school teachers, administrators, and personnel. Funded by contributions from members, employers, and the State of Illinois, as well as by investment income, TRS manages approximately $30 billion in assets. The system serves more than 350,000 members from all public schools except those in the city of Chicago. TRS is one of five state-funded retirement systems; the others are the State Universities Retirement System, the State Board of Investments, the State Employees' Retirement System, and the Judges Retirement System. TRS was founded in 1939." As apart of the New Deal Programs created to help the United States break through the economic depression the original aims were to help a population of low paid (mainly) female professionals spark the economy. It is important to ask - why as nearly a century has passed has the system remained nearly identical to its original state?
TRS’ s stated purpose: "The General Assembly created the Teachers’ Retirement System of the State of Illinois (TRS) in1939 for the purpose of providing retirement, disability, and survivor benefits to its participating members." The subsequent question: who are the members? These "TRS members include all full-time, part-time, and substitute Illinois public school personnel employed outside the city of Chicago in positions requiring certification by the Illinois State Board of Education. Persons employed in certain state agencies relating to education are also TRS members. As of June 30, 2009, there were 169,158 active members, 101,606 inactive members entitled to but not receiving benefits in TRS, and 94,424 annuitant and beneficiaries receiving benefits. The average age of an active full-time/part-time member was 42. The average age of an annuitant was 69. As of June 30, 2009, the average annual retirement annuity was $43,164." (Information as stated on the TRS website as of 03.23.10). In follow up research I discovered that one must work for 8 years to be "vested" or qualify for benefits - except for persons aged 62 and over, they just need 5 years.
Looking into the specifics of the plan helps highlight the main problems with the basic logic that prevents the plan from being feasible in the future. The basic problem is: there is not enough money going into the system to pay for the pensions when teachers retire - or the amount going in cannot possible reach the number needed to go out of the system.
To begin looking at the following age and service requirements:
·age 62 with 5 years of service, or
·age 60 with 10 years of service, or
·age 55 with 20 years of service (discounted annuity), or
·age 55 with 35 years of service
After one looks at the service requirements one must examine the formula to determine a persons pension. "The salary used in the calculation is the average of the creditable earnings in the highest four consecutive years within the last 10 years of creditable service" -It is here we begin to see a problem in logic - As we continue there is a maximum benefit retirement annuity that will not be more than 75 percent of the final average salary. But as we continue to look at the basic numbers the post-retirement adjustments further complicate and cost the state money. TRS states "Annuitants annually receive 3 percent increases in their annuities. The first annuity increase occurs on January 1 following the first anniversary in retirement or the attainment of age 61, whichever is later. The first monthly increase includes 3 percent for each year the member has been in retirement." Again, the TRS pension system is continually promising to increase their cost out to persons with pensions.
The Basic Flaw Explained:
By looking at the age where pensions begin - the age is too low - having a pension begin at 55 when life expectancy is in the mid 70s estimates that the average teacher will be on pension for nearly 20 years. In addition, some could argue (I have yet to find data to support this hypothesis) but teachers typically have good health care adding this to the general conservative lifestyles of teachers I believe that teacher lifespans would tend to be longer than the average American. This then leads us to the question: do the numbers add up. I created a spreadsheet showing the basic premise that they do not - thanks to my father I was able to estimate the average contribution of a teacher based upon the salary structure of my own district - in collaboration with my friend I then looked at different return rates of investment to determine a range of investment to then contrast with the pension costs based upon TRS' formula.
My Solution - which may get me kicked out of the union I belong to but was inspired by a colleague of mine -
Eventually there needs to be a change. Or the system will collapse. Why not create a system where the state and districts simply match the contributions of teachers. This is already done in the private sector by some companies. You take 9.4% of the teacher salaries that is pre taxes and it goes into this fund that is run by TRS (which is composed mostly of private investors now anyway) the state and the local districts should together match this number - there should be no promise of a pension but if you look at the overall money invested each person would have either $549,908 with 3% return or $796,594.98 with 5% return (those are just the numbers for individual return) you would then double those numbers with simply a state/district match - what this does is it would allow for - thee numbers below to look okay - currently this is pulled directly from my excel spreadsheet but if you add a state/district match you would be able to have these people live off of money equal to pensions that are 25 years past their retirement - it would be up to the people to run them effectively (could be problematic) but some may like the increased control - only downside for the TRS system is you do not have the money in your system as long as you would have to pay it out at retirement - but that is just my thought - I do not know if it makes any sense but the current system is broken - and just like with the problems of tearing down a school with sentimental value people do not want to break with tradition and allow for a better system to come -
The next important piece of information to consider is the graph below:
With my solution the state and employer (district) would simply be matching the member contributions at $876.2 - that means that if you simply cut down the state contributions by $600 million you would be right there - the state would save $600 million dollars a year and the teachers would be left with a matching 401k type portfolio that would allow them approximately 25 years of retirement at their pension level (except they would be left to manage it) but this would be beneficial for those that are unable to make the full 25 years as their family would be covered more completely. While the union, and most members would not be happy with this change, I believe that this is something that for the basic system must happen to allow for continued growth and success. My solution seems fair in terms of the money provided - while it would be unfair for the state to break with their legal agreement is a valid and strong point of view I am lucky enough to know that I will not be the one proposing this in reality so in my hypothetical world - it is simply my choice..
Below is information I found on TRS that I did not include in my explanation above but did help clarify the picture.
The designated beneficiaries of a member or an eligible annuitant will receive a survivor benefit upon the death of the member or annuitant. A lump-sum benefit is payable to nondependent beneficiaries. If all of the named beneficiaries are dependent beneficiaries, they may elect to receive a lump-sum benefit or a monthly benefit. A dependent beneficiary is a current spouse; an unmarried child who is a minor or full-time student between ages 18 and 22; an unmarried child of any age who is dependent by reason of a physical or mental disability; or a dependent parent.
A member may receive up to two years of service credit at retirement for 340 or more unused and uncompensated sick leave days.
Active TRS members are required to contribute 9.4 percent of their creditable earnings each year. This contribution is allocated as follows: 7.5 percent for retirement benefits, 0.5 percent for post-retirement increases, 1.0 percent for survivor benefits, and 0.4 percent to fund the Early Retirement Option.
State contributions are determined under a funding plan that became effective in fiscal year 1996. Although that law was subsequently amended, it remains a 50-year funding plan: 15 years of increasing state contributions followed by a 35-year period of more level contributions. The goal is to achieve an asset level that covers 90 percent of the System’s actuarial liability for benefits earned (a 90 percent funded ratio) by June 30, 2045. I have been unable find thus far the formula for how the state determines their contribution total. This formula is important as it determines the logic used.
TRS uses approximately 120 outside investment managers, a general consultant, and staff to invest the trust assets in accordance with investment guidelines established by the Board of Trustees and the fiduciary standards imposed by state law.