Retirement plan different from savings plan

The current effort in the Illinois General Assembly to “reform” the state-funded pension systems is not really about pensions. It’s really about the state budget, and where the state of Illinois wishes to spend your tax dollars. You see, the “great” state of Illinois is not so great anymore. It has major economic problems that are negatively impacting its ability to deliver the goods and services you expect.

After the budget issues are resolved, there needs to be a whole different debate about financial security in retirement. Whether we like it or not, we are all going to either die before retirement or enter retirement with or without a plan. Whether you have financial security in retirement is up to you and the tools available to you through tax policy, which brings me to the reason for this column.

We know enough about human nature to understand that it is difficult to save and invest for the future. This is especially true when you are first entering the workforce and retirement is 40 or 50 years away. You need to start saving and investing early and consistently. But, we do not. Given human nature, here’s what I would propose if I could build a retirement system from scratch:

Everyone needs to be enrolled in Social Security. It is a guaranteed program which provides a foundation to build retirement security. Currently, many Illinois public employees are not participating in Social Security, including teachers.

Pension income, including Social Security benefits, needs to replace 85 percent of your gross pre-retirement income. This percentage may seem high, but I’m bumping it up from what you normally read to take into consideration medical costs.

Both public and private sector employees need a guaranteed pension that they cannot outlive — it’s called a defined benefit plan. The investment risk is borne by the employer. Let’s face it, 99.9 percent of us have neither the education, time nor inclination to be sophisticated investors. Day trading (remember that!) doesn’t work for you or me.

Employer-sponsored defined benefit plans have been shown to achieve higher long-term investment returns and dramatically lower costs. At many public pension systems, investment returns cover 60 percent of the cost. 401(k) plans? They are expensive and ineffective. They are savings plans; not retirement plans.

Both employees and local employers need to fund the plan. The ratio of employer dollars versus employee dollars would be 50-50. Studies show that about 15 percent of pay is needed to fund a plan. Contributions by both parties would be mandatory and enforceable.

Retirement age needs to be appropriate — no earlier than 62, with full retirement benefits at 65. These ages would be automatically reset as longevity increases. If you wish to retire earlier, then personal savings/part-time work would be necessary to cover costs due to early retirement.

Earnings used to calculate a pension would be based on a 35-year history as with Social Security. The maximum recognized earnings would be set at five times the national per capita income. Pension spiking would be effectively eliminated. The pension earned would more reasonably reflect your lifestyle.

Inflation is a fact of life. It can be insidious for a retiree. A cost-of-living allowance is necessary and fair. However, it needs to reflect the changes in the consumer price index and not be based on an arbitrary fixed number (such as 3 percent).

Loans or refunds would not be permitted. This is a retirement plan; not a savings plan. If you die before receiving a benefit, your surviving spouse could receive a benefit or your contributions would be payable to a beneficiary.

Would this plan have prevented the $100 billion in unfunded liabilities carried by the state funded retirement systems? I believe it would have. Or, at least the taxpayers of Illinois would not be saddled with a $100 billion I.O.U. payable to the people who provide valuable health, safety and educational services.

Louis W. Kosiba is executive director of the Illinois Municipal Retirement Fund, which manages pension benefits for employees of more than 2,900 local government units in Illinois. Reach him at lkosiba@imrf.org.