Retired Illinois teachers received a collective $900 million bump above their original pension benefits last year.
These "cost-of-living adjustments" amounted to 21.3 percent of the $4.2 billion total retirement benefits paid to 101,288 former educators from around the state, officials from the Illinois Teachers' Retirement System reported. That's up from 18 percent of the total teacher pension payout just five years ago.
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A constitutionally guaranteed 3 percent annual increase in teacher pensions accounts for some of the spike. But the fact that these increases are compounded annually creates a secondary boost that significantly adds to the cost, many legislators have complained.
"The fact that one benefit can cost over one-fifth of the entire plan indicates how significant the current (cost-of-living adjustment) problem is," said state Rep. Elaine Nekritz, a Northbrook Democrat who was a member of Gov. Pat Quinn's pension reform team. "If you retired in 1995 with a $65,000 pension, you'd be getting more than $100,000 today. That's the miracle of compounding."
Bipartisan support in the legislature for cutting yearly increases in pension benefits for working and retired teachers, as well as other public sector employees, is providing some common ground on the divisive issue.
"Fixing the cost-of-living increases is the biggest component of any pension reform," said state Rep. Darlene Senger, a Naperville Republican who was also a member of Quinn's pension reform team. "A large part of the problem is due to the compounding."
Simply compounding a 3 percent increase to the current average teacher pension of $46,452 over a 25-year period produces an additional $114,238 over that span, compared to the same 3 percent increase if it had not been compounded. In year 25, the teacher's compounded pension would be $94,427. Not compounded, the pension would amount to $79,897.
"I think right now, it's a benefit that's not affordable for us," Nekritz said of the compounding component.
Legislators pushed off pension reform debate until later this year, but the lingering proposal would give current and former teachers two options. One option would allow teachers to maintain the 3 percent annually compounded pension increase, but lose access to state health care coverage in retirement. The other lets them agree to a non-compounded annual raise that would be based on half of the consumer-price index or 3 percent, whichever is lowest, and keep their retiree health insurance.
Legislators want to have teachers and other public employees vote on an option in early 2013. According to the Teachers' Retirement System's website, the governor's office estimates approval would amount to savings of between $33.4 billion and $37 billion over 30 years.
Currently, teacher pensions are based on the average salary of the four highest-paying consecutive years during the past 10 years of employment. Teachers with 35 or more years on the job receive a maximum of 75 percent of that amount as a starting pension.
Under the proposed change, there are pitfalls for working teachers with choosing the first option besides the loss of health care coverage in retirement. Choosing to maintain the 3 percent compounded annual increase would freeze a teacher's pensionable earnings at his or her current salary. That means future raises would not count toward the pension, a clear incentive for younger teachers to choose the other option.
"It is hard-core, and there's a huge savings there," Senger said. "If every current teacher chose not to take the deal, we'd still save $65 billion over 30 years because of the salary freeze."
The proposed legislation also sweetens the pot for longer-serving teachers by keeping the early retirement option, which is set to expire soon, intact for them.
But in the end, any legislation eliminating retirement benefits will most certainly be met with lawsuits from labor unions, who will challenge the constitutionality of changing or eliminating retirement benefits. But because health care in retirement is not a guaranteed benefit, many legislators believe they will triumph in any legal challenge.
Some legislators still are leery of the potential changes to annual pension boosts.
West Chicago Republican state Rep. Mike Fortner said he'd prefer to see an increase to employee contributions rather than risk a protracted legal battle over changing employee retirement benefits. He said increasing teacher retirement contributions by 1 percent would essentially pay for the compounded pension bump perk.
"They can keep the compounded plan as long as they're paying for it," Fortner said.
At 9.4 percent, the contribution rate teachers pay is already one of the highest in the state for public employees, and unlike many other public employees, teachers do not receive Social Security benefits on top of their pensions when they retire.
The teachers' pension program is the costliest public retirement programs in the state, accounting for nearly half of all public employee retirement expenses in Illinois.