Updated: March 1, 2019
Issue: Some critics of public pensions maintain that the current 9 percent paycheck contribution made by active TRS members does not “pay for” the member’s entire benefit when he or she retires. In particular, critics say that teacher contributions have not increased to correspond with and offset all of the benefit increases approved by the General Assembly since 1970, when a pension protection clause was added to the Illinois Constitution.
Discussion: The reality is teachers pay slightly less than half of the cost of their benefits when measured against their salaries. In fiscal year 2018, active TRS members paid 9 percent of the actual annual cost of TRS pensions and benefits, while state government paid 9.52 percent and local school districts, following state law, paid 0.58 percent.
From the beginning of TRS in 1939 until the creation of Tier 2 in 2011, teacher contributions were never intended to fund 100 percent of a member’s retirement annuity. The benefit is designed to be a shared responsibility of the members and the employers, which in the case of TRS are school districts and state government. TRS is responsible for investing these contributions and adding all investment returns to the trust fund to enhance its ability to pay member benefits.
The state, by law, assumes the lion’s share of the employer’s cost for Tier 1 because state government requires all active public school teachers outside of the city of Chicago to be TRS members. In addition, all public school districts are creations of state government. With Tier 2, the General Assembly changed the relationship and mandated that the members pay the entire cost of their benefits.
Here’s how it breaks down: The state’s total annual contribution for TRS in fiscal year 2018 was $4.09 billion, or 39.2 percent of the total $10.4 billion in salaries earned by all TRS members. However, that $4.09 billion was composed of $1.05 billion to cover the actual annual cost of pensions and $3.1 billion to help pay off the System’s unfunded liability.
Active TRS members contributed $938 million in FY 2018. Local school districts contributed $84.6 million.
When the contributions made by the state and TRS members to fund the actual cost of benefits are measured against the total payroll, the percentages are close: The state paid 9.52 percent of all teacher salaries for the cost of benefits and members paid 9 percent.
The only reason the state’s total contribution grew to 39.2 percent of payroll was the required payment for the System’s unfunded liability. For the last 80 years the state has never allocated to TRS an annual contribution that actuaries would determine is “full funding.” The state always has underfunded TRS. The $3.1 billion is the cost – plus interest – of not paying enough in the past.
The 9 percent TRS paycheck contribution rate in Illinois is among the highest rates in the nation. Only teachers in Arizona, Kentucky, Massachusetts, Missouri, Nebraska, Nevada, New Jersey, North Dakota and Ohio, paid higher rates. Illinois teachers and those in Kentucky, Missouri and Ohio do not participate in Social Security.
Since the founding of TRS in 1939, the teacher contribution rate to the System has more than doubled, from the original 4 percent to the current 9 percent, a 125 percent increase. Under state law, the majority of the contribution – 7.5 percent – funds retirement benefits, with the rest funding benefits for survivors and the annual cost of living adjustments.