Topics & Report

              Destroying public pension myths
Executive director’s message
Teachers’ Retirement System of the State of Illinois
Spring 2006topics &report
Retirement Security for Illinois Educators
Highlights
Page 2
• TRS investments fuel the economy
Page 3
• Legislative update
• Public Act 94-0004 implemented
Page 4
• Steps to first retirement check
Page 5
• Check beneficiary designation
• Benefit Choice Period May 1 through 31
• Plan for contribution limits
Page 6
• Your records are confidential
• Investor traps
Page 7
• Retiree turns 105 years old
Director’s message continued on page 2
Jon Bauman
Executive Director
Myth No. 1: Defined contribution plans cost less.
Most public pensions are struc­tured like TRS to pay a guaranteed percentage of one’s final average salary as a pension. That’s what we mean by a defined benefit plan.
In the private sector, many workers are covered by a defined contribution (DC) plan. The con­tribution may be any amount up to certain limits. Contribution exam­ples by Illinois and other states to their DC plans are listed below:
Illinois State
Universities
7.6%
Michigan State
Employees
up to 7.0%
Florida Retirement Systems
9.0%
Colorado PERA
10.15%
Ohio PERS
8.5%
South Carolina
Retirement Systems
8.55%
In comparison, the full employer cost of credit earned under the TRS defined benefit plan in the 2006 and 2007 school years is pegged at 8.2 percent of payroll and it is projected to decline in later years.
The costs are much the same. It’s a myth that defined contribu­tion plans cost less.
So why are state-funded pen­sions in Illinois the target of folks who say they cost too much? Let’s move on to Myth No. 2.
Myth No. 2: Deferring contributions saves money.
Cutting appropriations for pen­sions “saves money.” Well, does it? Let’s answer the question by doing an experiment.
Say you buy a car for $25,000 and make payments of $200 a month for five years. Anybody who has bought a car knows the monthly payment is way more than $200. What happens? At the end of five years, you have a car with a lot of miles on which you still owe a bunch of money. Why? The same compound interest that makes your savings grow makes your debt grow as well.
At TRS, the interest on the unfunded liability (a form of debt owed by the state) compounds at 8.5 percent per year. So do you save money by not paying current expenses when they are due? Not unless the state invests the money elsewhere and earns more that the 8.5 percent rate. So far, that’s never happened.
Another myth shattered.
A couple of guys on the Discovery Channel have great fun bust­ing myths. They destroy things. They blow things up. When it’s all over, they decide whether a myth is a myth or whether it is a fact. Since I am here to bring you “just the facts,” I’m taking aim at some popular “urban legends” involving public pensions. Let’s see if they are myths or facts.