Updated: Oct. 1, 2017
Issue: Some critics of public pensions maintain that the current 9 percent paycheck contribution made by active TRS members does not “pay for” the member’s entire benefit when he or she retires. In particular, critics say that teacher contributions did not increase to correspond with and offset all of the benefit increases approved by the General Assembly since 1970, when a pension protection clause was added to the Illinois Constitution.
Discussion: In fiscal year 2017, active TRS members actually paid slightly more for the actual annual cost of TRS pensions and benefits than will state government.
From the beginning of TRS in 1939 until the creation of Tier II in 2011, teacher contributions were never intended to fund 100 percent of a member’s retirement annuity. The benefit was designed to be a shared responsibility of the members and the employers, which in the case of TRS are school districts and state government. TRS is responsible for investing these contributions and adding all investment returns to the trust fund to enhance its ability to pay member benefits. The state, by law, assumes the lion’s share of the employer’s cost for Tier I because state government requires all active public school teachers outside of the city of Chicago to be TRS members. In addition, all public school districts are creations of state government. With Tier II, the General Assembly changed the relationship and mandated that the members pay the entire cost of their benefits.
Here’s how it breaks down: The state’s total annual contribution for TRS in fiscal year 2017 was $3.99 billion, or 37.8 percent of the total $10.5 billion in salaries earned by all TRS members. That $3.99 billion was composed of $871.3 million to cover the actual annual cost of pensions in FY 2016 and $3.25 billion dedicated to help pay off the System’s unfunded liability.
By contrast, under state law active TRS members contribute 9 percent of total salaries to the actual cost of their benefits, or $929 million in FY 2017. The total member contributions for the actual annual cost of TRS pensions that year were 8.8 percent higher than the share paid by state government.
The only reason state government’s total out–of–pocket expenses reached $3.99 billion in 2017 is because for the last 76 years the state has never allocated to TRS an annual contribution that actuaries would determine is “full funding.” The state always has underfunded TRS. The $3.06 billion is the cost – plus interest – of not paying enough in the past.
The 9 percent TRS paycheck contribution rate in Illinois is among the highest rates in the nation. In 2017, only teachers in Arizona, Kentucky, Massachusetts, Missouri, Nebraska, Nevada, New Jersey, North Dakota, Ohio, paid higher rates. Illinois teachers and those in Kentucky, Missouri and Ohio do not participate in Social Security.
Since the founding of TRS in 1939, the teacher contribution rate to the System has more than doubled, from the original 4 percent to the current 9 percent, a 125 percent increase. Under state law, the majority of the contribution – 7.5 percent – funds retirement benefits, with the rest funding benefits for survivors, annual cost of living adjustments and an early retirement program.