I was disappointed to read the letter from Ted Dabrowski of the Illinois Policy Institute as it obscures the reason for Illinois current pension morass and offers a solution that would be more expensive to Illinois and its residents.
Had the state of Illinois simply funded their portion of normal costs for pensions when due, currently 8 percent for the Teachers’ Retirement System, there wouldn’t be a pension crisis, as per the 2012 COGFA report, the TRS system would be approximately 80 percent funded. The problem is Illinois has, for so long, and in such large amounts, borrowed the pension contributions for other expenses, that it is now at the point where the interest due on the unmade payments far eclipses the principal.
Simply changing to a defined contribution program does nothing to solve the problem of past underfunding and would, most likely, cost more going forward. For example, the normal cost for new hires after 2011 under the TRS program is 6 percent of salary (8 percent for previous). If Illinois went to a defined contribution program then they would also have to start contributing into Social Security. If we are willing to assume that there will be some sort of a match on the 401K, then the cost to Illinois would easily be 10 to 12 percent of salary.
The TRS has over many decades done an excellent job, returning on average, over 9 percent annually. Assuming the normal payments are made going forward, and a few needed reasonable adjustments are made to the program, the system will be on sound financial footing. Going forward is not the problem; it’s the unfunded contributions and the interest on them, that has created the hole that is proving to be so painful to get out of.
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