Updated: May 1, 2019
Issue: An ongoing debate in Illinois state government and throughout the country revolves around whether Defined Contribution retirement plans (DC plans) are generally better for benefit recipients, more efficient and more cost effective for governments to operate as opposed to Defined Benefit retirement plans (DB plans). Currently, the majority of government-sponsored retirement plans are centered on DB plans.
In the past few years, legislation has been introduced repeatedly in the Illinois General Assembly that would close the state’s five DB plans, including TRS, for all active members and immediately place all new members in a DC plan operated by state government. In one proposal, all active members at retirement would receive a DB pension benefit based on the service and funds accumulated up to the date that the DB plans were closed, as well as distributions from the DC plan that would begin when the DB plans were closed. Retired members would continue to receive only the current DB benefit. None of these bills have been successful in the legislative process.
A government DB plan is a traditional pension. It requires contributions from each active member and public employer to a co-mingled trust fund. That fund provides each member with a guaranteed lifetime annuity upon retirement, regardless of how much the member and employer contributed to the trust fund for that member. All active members, employers and investment income fund the benefit payments of retired employees. Trustees controlling the retirement fund are responsible for all investment decisions. Members cannot outlive their benefits. The calculation of the annuity in each benefit category is proportionally equal for all participants.
A government DC plan, such as a 401(k) plan, 403(b) plan or a 457(b) plan, requires contributions from each active member and each public employer to individual accounts held by each member. The account owner decides how to invest the assets in the account. Upon retirement, the member receives a regular disbursement from his or her account until the funds in the account are exhausted. The rate of distribution is determined by the member. Members can outlive the assets in their accounts.
Discussion: In general, multiple studies over the last decade have shown that government-run DC plans are not generally better than government-run DB plans.
- Stand-alone DC plans are rarely used by government retirement systems
- DC plans are not popular among government employees as compared to DB plans
- A DC plan provides a smaller benefit to retirees than a DB plan
- DC plans costs more than DB plans and do not save the government money
- DC plan investment results are weaker than in DB plans
- In Illinois, active TRS members may have to enroll in Social Security and pay FICA taxes if they participate in a DC plan
Here is a look at the various issues in the DB vs. DC debate:
Public retirement plans in the 50 states
Through 2018, The 50 states and the District of Columbia have developed various retirement benefit menus for teachers and government workers. States administer stand-alone DB plans, stand-alone DC plans, DB plans that include a DC element, or a “cash balance” (CB) plan that combines aspects of both DC and DB benefits in a single plan.
“…none of the sponsors has followed the earlier Alaska-Michigan model of forcing employees to rely solely on a defined contribution plan where the employee bears all the risks. Rather…plans consist of either a hybrid plan or a cash balance plan, which is a defined benefit plan that maintains notional individual accounts but provides some guaranteed base return.” (CSLGE – 2014)
“The motivation for introducing a defined contribution type plan seems to differ before and after the financial crisis. Before 2008, the motivation appears to have been offering employees an opportunity to manage their own money and participate directly in a rapidly rising stock market. After the financial crisis, the motivation appears to be more defensive – to avoid the high costs associated with large unfunded liabilities; to unload some of the investment and mortality risk associated with traditional defined benefit plans; and to have a less back-loaded benefit structure to increase the amount that short-term employees can take with them when they leave.” (CSLGE – 2014)
Here are the retirement plan designs of each state as of July, 2018:
|
Alaska |
DC for all new hires since 7/1/06; DB for those hired previously |
|
Alabama |
DB |
|
Arkansas |
DB |
|
Arizona |
DB for teachers and state employees; public safety personnel hired after 6/30/17 must choose between a DC and DB-DC hybrid, an option that is also available to some employees hired previously |
|
California |
DB except CB for employees of community colleges that have elected to participate and some part-time school employees. Fewer than one percent of public workers participate in the CB plan. |
|
Colorado |
DB for teachers; DB for local government employees except optional DC for new hires on or after 1/1/20; DB for state employees except optional DC for new hires on or after 1/1/06; DB for most local public safety personnel except DB-DC hybrid for firefighters and police officers employed by departments who elect coverage under this plan |
|
Connecticut |
DB for teachers and state employees hired before 7/1/17; DB-DC hybrid for state employees hired on or after 7/1/17 |
|
District of Columbia |
DB for teachers and public safety personnel; DC for general employees |
|
Delaware |
DB |
|
Florida |
Optional DB or DC; DB is the current default option; DC will be the default option for new hires on or after 1/1/18; currently approximately 85 percent elect the DB plan |
|
Georgia |
DB for teachers and most local government workers; DB-DC hybrid for state workers hired since 2008 |
|
Hawaii |
DB |
|
Iowa |
DB |
|
Idaho |
DB |
|
Illinois |
DB |
|
Indiana |
DB-DC hybrid; state employees hired on or after 3/1/13 and employees of participating political subdivisions hired on or after 6/1/15 may elected to participate in a DC plan |
|
Kansas |
DB except CB for new hires since 1/1/15 |
|
Kentucky |
DB for teachers; CB for those hired since 1/1/14 |
|
Louisiana |
DB |
|
Massachusetts |
DB |
|
Maryland |
DB |
|
Maine |
DB |
|
Michigan |
DC for state workers hired since 1997; DB-DC hybrid for teachers hired since 2010 and for those hired previously who have elected to participate; choice of a default DC plan or a DB-DC hybrid for teachers hired on or after 2/1/18; DB or DB-DC hybrid for most local government workers |
|
Minnesota |
DB |
|
Missouri |
DB |
|
Mississippi |
DB |
|
Montana |
DB except optional DC for state and local government workers hired since 2002, who may choose between DB and DC. Approximately three percent of participants are in the DC plan. |
|
North Carolina |
DB |
|
North Dakota |
DB |
|
Nebraska |
DB for teachers and public safety personnel; CB for state and county workers |
|
New Hampshire |
DB |
|
New Jersey |
DB |
|
New Mexico |
DB |
|
Nevada |
DB |
|
New York |
DB |
|
Ohio |
Most teachers, state employees, and employees of local government hired since 2001 or 2002, depending on the plan, may choose between DB, DC, or a DB-DC hybrid. Approximately 95 percent of those offered a choice have elected the DB plan. Public safety personnel have a DB. |
|
Oklahoma |
DB except new state hires as of 11/1/15 have only a DC. |
|
Oregon |
DB-DC hybrid |
|
Pennsylvania |
DB; state workers hired beginning 1/1/19 and teachers and school employees hired beginning 7/1/19 will choose between a DB-DC hybrid plan and a DC plan. |
|
Rhode Island |
DB-DC hybrid |
|
South Carolina |
DB; state and school workers may choose between a DB and DC plan; roughly 80 percent of those offered a choice have elected the DB plan |
|
South Dakota |
DB |
|
Tennessee |
DB; DB-DC hybrid for teachers and state employees hired since 7/1/14; local governments may elect to participate in the hybrid plan |
|
Texas |
DB for teachers, state employees, and most employees of the largest cities; CB for employees of counties, most smaller cities and special districts |
|
Utah |
DB; those hired since 7/1/11 may choose between a DB-DC hybrid and a DC plan, each of which feature a maximum employer contribution rate of 10 percent of pay. |
|
Virginia |
DB for those hired before 2014; those hired since 1/1/14 participate in a DB-DC hybrid |
|
Vermont |
DB |
|
Washington |
Most participants may choose a DB or a DB-DC hybrid; roughly two-thirds have elected the DB plan |
|
Wisconsin |
DB |
|
West Virginia |
DB; teachers hired between 1991 and 2005 were enrolled only in a DC plan, and most of them have elected since to switch to a DB plan |
|
Wyoming |
DB |
The debate over closing DB plans and switching to DC plans
The Illinois Policy Institute, a private research organization with beliefs centered on “free-market” principles, has for years been a chief advocate of closing Illinois’ public DB retirement plans to new members, enrolling those new public employees in a DC plan and giving all current government employees the option of trading their existing DB plan for a new DC plan.
Advocates of replacing DB plans with DC plans say the financial problems facing DB plans – unfunded liabilities, less-than-adequate government contributions – cannot happen with a DC plan because contributions from members and employers are mandatory and not subject to the whims of politics or government economics. “…members won’t have to depend on IOUs from their local politicians,” according to the IPI. In addition, DC plans are more “portable” between different kinds of jobs or between different employers. In addition, the member makes the majority of investment decisions, so they have greater control over their assets.
For Illinois, the IPI backs a DC proposal which it says is “currently thriving” within the State Universities Retirement System. A DC plan options has been offered to SURS members since 1998. The IPI says the program has been successful because, in fiscal year 2018, the SURS DC plan had more than 20,000 members.
“A 401(k)-style retirement plan for state workers isn’t a novel concept – in fact the solution has been right under lawmakers’ noses for nearly 20 years.
“…He takes the one good retirement program already working in Illinois – an optional 401(k)-style plan for university workers – and he simply expands it for all state workers. “All concerns about constitutionality, viability and fairness are addressed…
And more than 20,000 state university workers already have these 401(k)-style plans as their retirement plans.” (IPI – 2017)
“Ted Dabrowski and John Klingner of the Illinois Policy Institute say this enrollment figure is impressive, because the 401(k)-style plan is not the default plan offered by Illinois’ public universities and colleges.” (Heartland – 2017)
“Impressive” is a subjective adjective. According to the SURS FY 2018 Comprehensive Annual Financial Report, the system had a total of 233,732 members as of June 30, 2018. Of that total membership, 22,604, or 9.7 percent, were enrolled in the DC plan; and 211,128, or 90.3 percent, were enrolled in the DB plan.
Stand-alone DC plans regularly have proven to be unpopular with public school teachers and government employees in other states.
Under a 2017 law in Pennsylvania, practically all members of the commonwealth’s public retirement systems were offered multiple choices in the future design of their benefits and had to make a decision in 2019. New employees had a choice between two hybrid retirement plans and a straight DC plan. Existing system members could stay in the legacy DB plan or switch to either one of the hybrid plans or a straight DC plan.
Out of 103,000 government employees eligible to make the decision, only 70 chose to leave the DB plan – 65 transferred into the DC plan and five into a hybrid design. For new employees, only 36 of 2,500 chose the DC plan. The rest opted for one of the other alternatives. Even state legislators, who created the retirement option as a way to reduce the cost of the public retirement systems, preferred to stay in the legacy DB plan. Out of 250 lawmakers, 198 chose to remain in the DB plan and 20 switched to the DC plan. Thirty-two Pennsylvania legislators do not participate in the retirement system.
“In fact, from 2006 through 2015, DB pickup rates have been 70% or more every year for new hires in each of those states – Colorado, Florida, Michigan, North Dakota, Ohio, South Carolina and Utah, the report shows… "When employees have a choice, pensions continue to win in a landslide,’ said Jennifer Brown, manager of research for NIRS and co-author of the report…” (P&I – 2017)
Switching from a DB plan to a DC plan; and then back again
West Virginia’s Teacher Retirement System was a DB plan from 1941 to 1991, when state government closed the plan to new members and new hires were placed in a DC plan. In 2005, the DC plan was closed and all members were switched back to a DB plan. Under the DC plan in 2005 the average total member account balance was $23,193, while the average annual retirement benefit under the old DB plan was $29,777. In addition, higher investment returns under a DB plan are projected to save the state $1.4 billion in annual contributions between 2005 and 2034. (Pension Review Board – 2012)
Nebraska created a DC plan for state and county workers in 1967 because the existing DB plans for educators and judges were underfunded. In 2002, the state closed the DC plan and transferred all members to a “Cash Balance Plan” that, like a DB plan, provides a guaranteed annuity in retirement. The switch was the result of a state report which said the DC plan had higher administrative costs, lower benefits and lower investment earnings than the state’s DB plan. (Pension Review Board – 2012)
In 2012, the Town Council of Palm Beach, Florida voted to move all of its public employees, including firefighters and police officers, from a traditional DB plan to a hybrid plan that included “dramatically lower DB pensions and new individual DC retirement accounts.”
However, four years later Palm Beach reversed this policy course by eliminating the DC aspects of its retirement plan and reinstated a DB plan that had enhanced benefits.
Palm Beach discovered that reducing the original DB benefits “caused a mass exodus of public safety officers” for neighboring towns that had kept their DB retirement plans. Over four years with a hybrid plan, 20 percent of the town’s workforce resigned, as well as more than 100 first responders. Because of the resignations, Palm Beach saw the cost of government rise in other areas. “For example, firefighters had to work extremely high levels of overtime to fill staffing gaps.” In addition, training courses for newly-hired officers totaled close to $20 million. (NIRS – 2018)
“The DC switch proved a failed experiment in Palm Beach.” (NIRS – 2018)
Despite four decades of corporate support for DC plans over DB plans as a retirement savings vehicle, opinions have changed. Many industry observers note that the 401(k) plan was never designed to be the primary retirement plan for an American worker. It was always intended to be a secondary retirement account that supplemented a pension. Private companies that ended their pension plans in the last 15 years created the notion that a person could – and should – retire on a 401(k) alone.
“401(k)s are an accident of history…Though 401(k)s took off in the early 1980s, Congress did not intend for them to replace traditional pensions as a primary retirement vehicle, and 401(k)s are poorly designed for this role.” (Economic Policy Institute – 2013)
“’The great lie is that the 401(k) was capable of replacing the old system of pensions,’ says former American Society of Pension Actuaries head Gerald Facciani, who helped turn back a 1986 Reagan administration push to kill the 401(k). ‘It was oversold.’”(Wall Street Journal – 2017)
Compared to DB plans, DC plans provide a smaller retirement benefit
In Michigan, 20 years after the closing of a government DB plan and a switch to a DC plan for new hires, the state Office of Retirement Services said that the median account balance of state employees in the DC plan was about $37,000. The average balance was about $77,000. Based on these totals, a state employee retiring at age 65 would have a monthly retirement income of $400. (The Hill – 2017)
The balances in 401(k) accounts vary by age with higher balances held by people closer to retirement. But for all demographic groups, the average and median balances indicate that for most people, a 401(k) is likely insufficient to secure an appropriate lifestyle in retirement. At the end of 2018, the average 401(k) balance across the nation was $106,500. The median, or the midpoint between the highest balance and the lowest balance, was smaller – $24,800.
Here are the average and median balances in 2018, according to Fidelity Investments:
- Ages 20 – 20: Average -- $11,600 Median -- $4,000
- Ages 30 – 39: Average -- $43,600 Median – $16,500
- Ages 40 – 49: Average -- $106,200 Median -- $36,900
- Ages 50 – 59: Average -- $179,100 Median -- $62,700
- Ages 60 – 69: Average – $198,600 Median -- $63,000
A couple earning $75,000 before retirement has a 90 percent chance of outliving their assets in retirement if they don’t have a DB plan. (Ernst and Young – 2008; Pension Review Board – 2012)
An individual earning $60,000 annually with a 401(k) would need to save $343,847 by the time he or she retired in order to secure a yearly retirement income equal to $48,000, or 80 percent of $60,000. (Journal of Financial Planning in Pension Review Board -- 2012)
In Nebraska, the average annual benefit for a member of the state’s DB plan was $16,797, while the average annual benefit for a similar member of the state’s old DC plan was $11,230. (Center for Tax and Budget Accountability – 2007)
“Pensions provide significantly more valuable benefits than 401(k)s for typical teachers in all six states. Thus, most teachers would require substantially higher contributions to realize the same retirement income in a 401(k) as the lowest-tier pension.” (UC Berkeley – 2019)
“They face the risk of either spending too quickly and outliving their resources or spending too conservatively and depriving themselves of necessities…Individuals are on their own.” (Los Angeles Times – 2017)
“The typical working household close to retirement age had only $111,000 at the end of 2013 in their 401(k) savings plan at work and individual retirement accounts outside of work…That $111,000 would provide only $500 a month for living expenses if converted to an annuity.” (Chicago Tribune – 2014)
Closing a DB plan raises government contributions
Closing a DB plan and transferring members to a DC plan undercuts historic revenue streams to the DB plan needed to pay the obligations of the DB plan, forcing state government contributions to increase. Only two revenue streams would exist – the annual state contribution and investment income. The state’s pension investment income varies from year to year, depending on the strength of the world economy.
Closing all five state public DB plans in Illinois and transferring members to DC plans would not eliminate the $223.3 billion in obligations to teachers and public employees that have accumulated through fiscal year 2018. Those obligations include an unfunded liability of $133.7 billion. Those obligations have to be paid. (COGFA – 2019)
Closing all five state public DB plans and transferring members to DC plans would, for several years, greatly increase annual state contributions beyond current projections. Government accounting standards require a sponsoring government to fully fund a closed DB plan by the time the last current member retires; which would be approximately 30 years. (TRS Study – 2010)
Under current circumstances in Illinois, that means eliminating the $133.7 billion unfunded liability and achieving 100 percent funding by 2045, a more aggressive funding schedule than currently exists. Current state law requires the state to reach 90 percent funding by 2045.
In addition, contributions from active members end and no replacement funds are added. However, at the same time, more and more DB plan obligations must be paid as members retire. (Keystone Research Center – 2013)
A perpetual state-run DB plan like TRS continually enrolls new members, which mitigates the probabilities that some members will live longer than expected and receive more in retirement than members that die earlier than expected or live only to the average life expectancy. In a closed DB plan, the expectation that all members will live beyond the average life expectancy must be factored into the funding calculation, which raises costs.
“Advocates of switching from DB to DC plans position the change as reducing employer costs for unfunded liabilities, but the move to DC accounts does nothing to reduce plan liabilities on its own.” (NIRS – 2018)
“However, when the (DB) plan is closed, there are no new employees paying into the system. Eventually, the number of retired employees withdrawing benefits begins to dramatically overwhelm the number of active employees continuing to pay into the system.” (NPPC – 2017)
“The experience in other states clearly shows that switching from a pension to individual accounts doesn’t just magically close funding shortfalls. In fact, the switch opens a new funding hole causing shortfalls even worse by starving the pension of future contributions.” (NIRS – 2015)
“…DB plans not only provide all participants in the plan with enough money to last a lifetime, but also accomplish this goal with less money than would be required in a DC plan. Because DB plans need to fund only the average life expectancy of the group, rather than the maximum life expectancy for all individuals in the plan, less money needs to be accumulated in the pension fund.” (NIRS – 2014)
In 2010, TRS estimated that if the system’s DB plan was closed that year, the fiscal year 2011 state contribution would climb 123 percent, from $2.3 billion to $5.2 billion. (TRS Study – 2010)
In Michigan, the state’s public DB plan was closed to new members in 1997 and DB plan members were given two chances between 1997 and 2012 to switch to the new DC plan. DB plan revenue from active member contributions has gradually declined over time as these members retire and no new members are added. As a result, the state’s annual contribution to the DB plan increased from $229.5 million in 1997 to $447.9 million in 2011. The funded ratio of the DB plan decreased from 109 percent in 1997 to 72.6 percent in 2010. (Pension Review Board – 2012)
After the switch, the unfunded liability of the state employee retirement system grew from $697 million in 1997 to $4.078 billion in 2010. (Keystone Research Center – 2013)
Alaska closed its DB plans for new teachers and public employees in 2006. The state’s annual contribution to the two plans was $1.05 billion in 2012 and is expected to grow to $2.46 billion in 2029. (Pension Review Board – 2012)
After the switch, the unfunded liability of the two state retirement systems grew from $3.8 billion in 2006 to $7 billion in 2011. (Keystone Research Center – 2013)
In San Diego, the voter-mandated switch from a DB plan for employees to a DC plan increased the city’s annual pension contribution in 2013 by $27 million. The city owes $7.3 billion to employees from the old plan. The city’s total annual pension contribution in 2013 was $275 million and will gradually increase to $323 million in 2025 and then decline to $82 million in 2029. (San Diego Union-Tribune – 2013)
In New Hampshire, a 2012 study said closing its public employee DB plan would increase the retirement system’s unfunded liability by $1.2 billion. (Keystone Research Center – 2013)
In Texas, a 2012 study said closing its DB plan for teachers would increase the retirement system’s unfunded liability by $11.7 billion. (Keystone Research Center – 2013)
DB plans cost less to administer than DC plans and are more efficient
It was estimated in 2007 that if all five Illinois retirement systems switched from a DB plan to a DC plan, administrative costs would rise anywhere from $275 million to $610 million per year. (Center for Tax and Budget Accountability – 2007)
The cost of administration and investing for a DB plan are 0.43 percent of total assets in a retirement plan, while the same costs for a DC plan equal 0.95 percent of total plan assets. (Center for Retirement Research – 2006, in Pension Review Board -- 2012)
In Nevada, a 2010 study found that ending the state’s DB plan for public employees and replacing it with a DC plan would cost the state an additional $1.2 billion over two years. (Las Vegas Review-Journal – 2010)
In Minnesota, a 2011 study of transferring public employees from a DB plan to a DC plan found that transition costs would total an additional $3.5 billion over 15 years. (National Institute on Retirement Security – 2012)
“In 2003, West Virginia found that providing a pension to teachers cost taxpayers half the amount of a comparable 401(k)-style plan…Michigan, too, has seen plan costs increase and funding levels decrease.” (The Hill – 2017)
“For a given level of retirement income, a typical individually directed DC plan costs 91 percent more – almost twice as much – as a typical DB plan.” (NIRS – 2014)
Investment returns are stronger for DB plans than DC plans
“Researchers find a large and persistent gap when comparing investment returns in DB and DC plans, although the gap has narrowed somewhat over time. A 2018 report from CEM Benchmarking finds that DB pensions outperformed DC plans in average by 47 basis points, net of fees, over the 10 years ending in 2016 – largely due to differences in asset mix.
Watson Wyatt found that DB plans outperformed DC plans by an annual average of 76 basis points, net of investment expenses, from 1995 to 2011.” (NIRS – 2014)
Between 1995 and 2011, the average rate of return for DB plans was 8.01 percent, while the average return rate for DC plans was 7.25 percent; a difference of 76 basis points. (Towers Watson Insider – 2013)
Between 1988 and 2004, DB plans had a weighted median return rate of 10.7 percent, while the return rate for DC plans was 9.7 percent. (Center for Retirement Research – 2006, in Pension Review Board -- 2012)
In Nebraska, public employees in a DC plan saw an investment return of 6 percent between 1983 and 1999, compared to 11 percent for public employees in the state’s DB plan. (Center for Tax and Budget Accountability – 2007)
“DB funds outperformed DC plans by 0.46% from 2007 – 2016, a substantial narrowing of the gap from the 1.80% net return difference from 1998 – 2005.” (CEM – 2018)
“Behavioral economic studies have shown that plan participants are often overwhelmed by the amount of decisions they need to make in a DC plan.” (CEM – 2018)
“Of course, moving away from defined benefit plans means that individuals must face the risk of poor investment returns…and the risk that inflation will erode the value of their income in retirement – on at least a portion of their retirement savings in hybrid plans.” (CSLGE – 2014)
DB plans that continue to take in new members can diversify their investment portfolios over a longer period of time, which increases investment return. A closed DB plan must conserve funds in order to meet all of its obligations in a shorter period of time, so only short-term investments are used and as a result return is reduced. (Keystone Research Center – 2013)
“…a DB pension fund endures across generations; thus a DB plan, unlike the individuals in it, can maintain a well-diversified portfolio over time. This well-diversified portfolio will include investments which are expected to earn higher returns than a less diversified portfolio, which focuses on more secure but lower-returning asset classes.” (NIRS – 2014)
DC Plans have higher administrative and investment fees
DC plan investment decisions are made by the member; DB plan decisions are made for a pooled fund by a board of trustees and professional investment managers. Professional managers in most cases diversify the portfolios of DB plans across several asset classes to moderate risk and return; similar portfolio diversification is less prevalent in DC plans.
“A DC plan involves costs that do not exist in a DB plan, such as the costs of individual record keeping, individual transactions, and investment education to help employees make good decisions.” (NIRS – 2014)
“Research has found that DB plans have broadly diversified portfolios and managers who follow a long-term investment strategy. We also know that the average individual in DC plans, despite their best efforts, often falls short when it comes to making sound investment decisions…Furthermore, studies show that over the long term, individual investor level returns significantly lag behind the returns of any individual asset class or benchmark – largely due to inappropriate investment decisions.” (NIRS – 2014)
“By pooling assets, large DB plans are able to drive down asset management and other fees. For example, researchers at Boston College find that asset management fees average just 25 basis points (e.g., 0.25 percent) for public sector DB plans. By comparison, asset management fees for private sector 401(k) plans range from 60 to 170 basis points…We find that a DB plan can provide the same level of retirement income at almost half the cost of an individually directed DC plan.” (NIRS – 2014)
“In New York, a 2011 study found that the administrative costs of DB Plans are 36 percent to 38 percent lower than a DC Plan providing equivalent benefits.” (Keystone Research Center – 2013)
As DC plan members approach retirement, they choose safer investments and return is reduced. Co-mingled DB plan portfolios maintain consistent risk and return parameters because there is no “end” to the plan. (Pension Review Board – 2012)
Enrollment in a DC Plan could lead to enrollment in Social Security
TRS members currently are not enrolled in Social Security and do not pay the federal FICA tax because TRS retirement benefits equal or exceed the minimum “safe harbor” benefit floor set by the Social Security Administration. (TRS Study – 2010)
TRS members automatically would be enrolled in Social Security if the minimum TRS benefit fails to meet the “safe harbor” limit. TRS members would then have to pay half of the 12.4 percent FICA payroll tax, or 6.2 percent. School districts would have to pay the other half.
The reportable earnings of TRS members in fiscal year 2018 were $10.6 billion, so total FICA taxes paid would have been approximately $1.32 billion. School districts would have been responsible for $660.3 million of that tax payment.
Sources:
Center for Tax and Budget Accountability – “The Illinois Public Pension Funding Crisis: Is Moving from the Current Defined Benefit System to a defined Contribution System an Option that Makes Sense?” – 2007
Teachers’ Retirement System of the State of Illinois – “Costs of Defined Contribution Plans & Social Security” PowerPoint – August 5, 2010.
Las Vegas Review-Journal – “Segal study calculates cost of switching Nevada public workers to a defined contribution plan” – December 15, 2010
Pension Review Board – “A Review of Defined Benefit, Defined Contribution, and Alternative Retirement Plans” – May, 2012
National Institute on Retirement Security – “On the Right Track? Public Pension Reforms in the Wake of the Financial Crisis” – December, 2012
San Diego Union-Tribune – “Annual payment $44 million higher, thanks to Proposition B switchover and lackluster investment returns” – January 12, 2013
Keystone Research Center – “Digging a Deeper Pension Hole” – February 26, 2013
Towers Watson Insider – “DB Versus DC Investment Returns: The 2009- 2011 Update” – May 22, 2013
Economic Policy Institute – “Retirement Inequality Chartbook; How the 401(k) revolution created a few big winners and many losers” – 2013
Center for State & Local Government Excellence – “Issue Brief – Defined Contribution Plans in the Public Sector: An Update” – April 2014
Commission on Government Forecasting and Accountability; Illinois General Assembly – “State of Illinois Budget Summary Fiscal Year 2015” – August 1, 2014
Chicago Tribune – Are you your retirement fund’s worst enemy? – September 24, 2014
National Institute on Retirement Security – “Still a Better Bang for the Buck” – December, 2014
Investment Company Institute – “ICI Research Perspective: 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2013 – December, 2014
The Wall Street Journal – The Champions of the 401(k) Lament the Revolution They Started – January 2, 2017
The Hill – Public pension matter – just ask Michigan and West Virginia – April 10, 2017
National Public Pension Coalition – Closing a Pension Plan Increases costs for Taxpayers – May 8, 2017
Illinois Policy Institute – Illinois senator’s proposal offers pension reform through 401(k)-style plans – May 11, 2017
Heartland Institute – Research & Commentary: Solution for Illinois Pension Crisis Is closer than You Think – May 19, 2017
Pension & Investments – Vast majority of public employees choose DB over DC where option is available – August 23, 2017
CEM Benchmarking – Defined Contribution Plans Have Come a Long Way! – February, 2018
National Institute on Retirement Security – Retirement Reform Lessons: The Experience of Palm Beach Public safety Pensions – February, 2018
National Association of State Retirement Administrators – Spotlight on Significant Reforms to State Retirement Systems – December, 2018
UC Berkeley Labor Center / National Institute on Retirement Security – Teacher Pensions vs. 4019K0s in Six States: Connecticut, Colorado, Georgia, Kentucky, Missouri, and Texas – January, 2019