Pension cuts could boost state's Social Security costs
'Unintended consequence' of Social Security costs shows changing system is difficult
SPRINGFIELD -- Lawmakers are getting set to debate teachers' and state workers' retirements once again, but some caution that a previous cut to benefits actually could cost the state money years from now.
The issue illustrates some of the difficulties in making changes to the state's complicated public pension system, the biggest target for reformers focused on fixing Illinois' fiscal mess.
Public school teachers don't qualify for Social Security and, as a result, school districts don't have to pay Social Security taxes on them.
But state officials in 2010 raised the retirement age for new workers and otherwise cut benefits in a way that some say could qualify those workers for Social Security at some point.
Consultants for TRS warned of the potential Social Security problem in a presentation two years ago, and unions have brought up the point often since.
In order for public school teachers to be exempt from participating in Social Security, "a plan must provide an adequate retirement income to its participants," Buck Consultants told TRS in October 2010.
"It seems likely that, at some point in the future, the TRS second tier plan will no longer meet the requirements," the consulting company wrote.
Teachers' Retirement System spokesman Dave Urbanek says teachers in the new, lower, pension plan pay 9.4 percent of their salaries for benefits worth about 6 percent.
If the federal government eventually found that Illinois teachers should become part of Social Security, both teachers and school districts would be on the hook for the 6.2 percent Social Security tax, putting a major ding in the savings realized by cutting pension benefits.
Urbanek said the danger is many years off but looms as an unintended consequence of pension reforms from two years ago.
"Right now, it's a warning flag," Urbanek said. "This is something that we need to watch."
The Catch-22 highlights how complex and difficult solving the state's more than $90 billion in pension debt continues to be. Along with the political difficulties and perceptions of unfairness both parties face in cutting the retirement benefits of teachers in the face of strong union opposition, the policy questions can be daunting as well.
Lawmakers remain gridlocked over whether local school districts should pay more for teachers' pensions -- a move that would free up about $1 billion for the state but could foist millions of dollars in costs onto local school budgets.
Last week, leaders of the Civic Committee of the Commercial Club of Chicago, a group that has pushed for pension cuts for years, called the problem "unfixable," underscoring the difficulty in solving it even as critics derided that comment as posturing.
Lawmakers are set to try again in the coming months because as the state's retirement costs grow, money to pay for schools, parks, universities, prisons and care for the disabled becomes harder for lawmakers to find every year.
Union leaders say recent benefit-cutting proposals mulled by lawmakers likely wouldn't run afoul of Social Security exemptions.
"I'm not sure they're looking to cut benefits to that level," said Illinois Education Association spokesman Will Lovett.
The proposals floated by Democrats this year include what they believe is a fix for the Social Security problem -- an alternative for people in the new, less generous pension system that would be similar to a 401(k), but with guaranteed yearly gains.
State Rep. Elaine Nekritz, a Northbrook Democrat and negotiator on the issue, says if approved, the new proposals should solve the Social Security problem.
"We know that the potential is out there," she said.
The question facing lawmakers as they return to Springfield after Thanksgiving, though, is whether changes to the state retirement system can be approved after months of stalemate.
Gov. Pat Quinn wants lawmakers to come to an agreement on pensions before Jan. 9, when newly elected lawmakers are sworn into office.
The 2010 changes that are both saving the state money and causing possible Social Security issues were approved in one day. The legislation was introduced in a Capitol committee room before unions had time to react, and it was on Quinn's desk by the end of the day.
"That's kind of what happens when public policy gets made in 12 hours," Lovett said.
The yearlong debate might help forgo unintended consequences this time, but the complex question could always generate new issues decades down the road.
"If I knew what they all were, I'd fix them," Nekritz said.
Any new law would have to survive a nearly inevitable court challenge from unions representing the affected teachers and workers.
The urgency to reduce pension costs is only growing, especially as the federal so-called fiscal cliff could blow a $1 billion hole in the state's already hurting state budget.