Today’s Problems
How the Retirement Systems for Teachers Throughout Illinois and Chicago Fail to Meet the Four Principles
Illinois Tier 2 Teacher Retirement Option is Implicitly and Explicitly Unfair
The very existence of Tier 2 indicates that teachers are being treated differently in terms of their retirement benefits. There may have been legitimate reasons for creating Tier 2, but the way Tier 2 benefits are designed creates an ‘us’ versus ‘them’ dynamic between teachers in the different tiers. The benefit provisions for Tier 2 are manifestly unfair on their own terms because they will not provide enough income to ensure retirement security for most Tier 2 teachers. The benefit provisions for Tier 2 are unfair relative to the value of benefits for Tier 1, particularly with respect to a later retirement age, more service years required for calculating final average salary, and caps on benefits (specifically, the pensionable income cap).
The benefit differences between Tier 1 and Tier 2 result in less retirement income for Tier 2 teachers, which in turn means less overall compensation for Tier 2 teachers. The implication is that the work Tier 2 teachers do to serve children is valued less than service from Tier 1 teachers.
The funding policy currently in place uses Tier 2 teacher contributions to pay down the unfunded liabilities of Tier 1. This is inappropriate, and it means that either Tier 2 member benefits could be higher and/or that their contribution rates could be lower.
Portability is Lacking
Pension plans can be designed to provide portability, but neither TRSIL or CTPF benefit provisions don’t offer any such features. Teachers who leave before vesting will get their own contributions back, but without even the nominal interest they would have earned in a basic savings account. None of the employer contributions made on behalf of members are portable, depriving them of deferred compensation that has been earned.
Teachers in Tier 2 have to wait ten years in order to vest and be qualified to receive a future benefit upon retirement. Fully half of Illinois teachers leave before this point. Any educator who moves away from Illinois or leaves public school teaching before vesting leaves behind their retirement plan and much of the retirement income they have accumulated. Illinois teachers also do not participate in Social Security, meaning they lack the additional, portable safety net retirement plan that most other Americans have.
There is currently no option for Illinois teachers to enroll in a retirement plan that would transfer with them should they go teach in other states or private schools. A Tier 3 hybrid retirement plan that would have some portability features was announced in 2017, but it has not since been implemented.
Financial Education is Not Prioritized
Far too many Illinois teachers are unaware of how their retirement benefits work and do not understand the differences in structure and benefits between Tier 1 and Tier 2.
For the most part, Illinois teachers are left to learn about their retirement system and its benefits on their own. There are resources available from the TRSIL and CTPF systems, but this information is not well organized and is hard to understand. Further, few teachers seek out these resources until they are approaching retirement.
Many educators get information about their retirement savings from salespeople promoting supplemental plans who cannot be relied upon as objective or deeply knowledgeable resources.
Sustainability is Questionable
Illinois’ teacher retirement systems have a nearly $90 billion shortfall, even after accounting for strong investment returns in 2021. This unfunded liability is money that the state owes to the retirement systems for future retirement benefits to be fully paid out.
TRSIL and CTPF are both using unrealistic assumptions about future investment returns.
The actuary advisors for TRSIL and CTPF have warned the respective retirement boards that the funding policy adopted in the Illinois Pension Code may not be sufficient because it does not target having 100% funded teacher retirement benefits in the future. Current state law determines contributions based on the goal of being only 90% funded in the next few decades. Historically, the state has not been good about honoring its promises and ensuring it pays an adequate amount into TRSIL and CTPF.
Tier 2 was created to be a low cost retirement benefit as a way to help the state have more money to pay down these shortfalls. Devaluing new teachers and asking them to take less compensation as a means to supplement the costs of paying down Tier 1 unfunded liabilities is not a sustainable long-term strategy. Budget costs in the near-term may be lower for the state, but the lack of investment in educators and students may cost far more in the longer term.