TRS of Illinois

Pension Reform

ERO Sunset July 1, 2016

Updated: July 6, 2016

Issue: The TRS Early Retirement Option automatically expired on July 1 because the General Assembly did not vote to extend the program.

Discussion: The sunset of the ERO program affects active and inactive TRS members. Approximately 200,000 active and inactive TRS members will be eligible in 2016 for a refund of the total contributions they paid between 2005 and 2016 to help fund the program. In addition, the TRS payroll contribution of active members was reduced from 9.4 percent to 9.0 percent.

The TRS active member contribution decreased to 9 percent from 9.4 percent

Between July 1, 2005 and June 30, 2016, active TRS members paid 0.4 percent of their creditable earnings to help support the ERO program. As of July 1, the payroll contribution for all active TRS members was reduced from 9.4 percent of their salaries to 9 percent because the ERO program is no longer in existence.

ERO Sunset Refunds available in late 2016

Eligible TRS members will be able to apply for a refund of their ERO contributions beginning in December of 2016. The refunds will not be automatically distributed without application. No deadline exists for applying for a refund, but ERO contributions left with the System will not accrue interest over time.

ERO Sunset Refunds will not be available until later this year because TRS cannot calculate the exact refund amount for each eligible member until every school district’s Annual Report of Earnings for the 2015-2016 school year has been processed.

Annual Reports include official earnings information for all active members, including ERO contributions. TRS will finish processing the reports in November. Then, TRS will notify TRS members who are eligible for an ERO Sunset Refund about when and how they can apply.

Please do not contact TRS now seeking an estimate of any ERO Sunset Refund or the confirmation of an unofficial estimate.

Members can calculate a “ballpark” estimate of their potential ERO Sunset Refunds by adding their annual TRS creditable earnings from each year between July 1, 2005 and June 30, 2016 and multiplying that total by 0.004.

Creditable earnings can be found on a member’s Benefits Report, which is available in the secure Member Account Access area on the TRS website. Any creditable earnings originating from a TRS disability benefit will not be used in the official calculation of any ERO Sunset Refunds.

TRS will calculate each eligible member’s official refund because other factors will influence the actual refund total, such as federal income tax and any unpaid state taxes or loan balances.

Eligible members have 3 options in seeking a refund

Active and inactive TRS members eligible for a refund will have three options this year:

  • Apply for a cash refund that will be mailed to them.
  • Apply for a withdrawal with the intention of “rolling over” the taxable portion of the refund into a qualified non–TRS retirement plan, such as a 401(k), 403(b) or an IRA.
  • Do nothing and leave the ERO contributions with TRS. Members can apply for a refund at a later date, but no interest will accrue if the ERO contributions are left with TRS.

Retirement eligibility without ERO

The sunset of ERO does not change the eligibility requirements for any TRS member’s retirement. The earliest a member can receive a retirement benefit is at age 55 with 20 years of service. If the member retires between the ages of 55 and 60 with at least 20 but fewer than 35 years of service, his/her retirement annuity is reduced by 6 percent for every year he/she is under age 60.

Retired members not eligible

Retired TRS members are not eligible for the ERO Sunset Refund. Members who retired before June 30, 2016 and did not participate in the ERO program had ERO contributions refunded to them at retirement. Under state law, members who retired before June 30, 2016 and participated in the program are not eligible for the refund.

ERO Sunset Refund considerations

Federal Income Taxes, Early Withdrawal Penalties and Unpaid State Debts

Mandatory federal income taxes will be withheld from all cash refunds at a rate of 20 percent. Members also may be subject to early withdrawal penalties.

After a cash refund is issued, members will receive an Internal Revenue Service 1099-R form in the January following receipt of the refund.

Also, refunds that are not directly rolled over are subject to involuntary withholding as defined in the Illinois State Collection Act of 1986 (30 ILCS 210). The act covers unpaid debts that include delinquent child support, overpaid state unemployment benefits, delinquent state taxes, federal tax levies and delinquent student loans.

Money Owed to TRS

TRS cannot accept a direct rollover of ERO contributions to pay off a member’s unpaid account balance with the System, such as payments due for a 2.2 Upgrade or the purchase of optional service credit.

Administration of the Refund or Withdrawal

A member’s decision regarding his or her ERO contribution refund is irrevocable. Once a refund or withdrawal is submitted to TRS, it will be processed.

Refund and withdrawal checks will be issued and mailed by the Illinois Comptroller’s Office. An electronic transfer of funds is not available for this transaction.

TRS does not provide financial advice concerning which decision is best for any member. Members are encouraged to contact a licensed financial advisor for advice. 

2013 Pension Changes for TRS Ruled Unconstitutional

Public Act 98-0599 (Senate Bill 1)

Updated: November 1, 2015

Issue: The Illinois Supreme Court ruled unanimously on May 8, 2015 that a comprehensive plan to overhaul the Illinois Pension Code, Public Act 98-0599, was unconstitutional.

Public Act 98-0599, otherwise known as Senate Bill 1, was signed into law by former Gov. Pat Quinn on December 5, 2013. The goal of the new law was to stabilize TRS finances and eliminate the System’s unfunded liability by 2044, primarily by reducing benefits for retired and active members and creating funding guarantees and contribution levels that would have gradually, over 32 years, fully funded TRS.

Discussion: The Supreme Court decided that changes in benefits enacted by the law violated the Pension Protection Clause of the Illinois Constitution. This decision is the final chapter in a 16-month-long legal challenge to Senate Bill 1.

With this decision, for the foreseeable future TRS members in Tier I and Tier II will see no changes in their retirement benefits and the administration of these benefits. The current retirement benefit calculations, cost-of-living-adjustment calculations, active member contribution rate, all retirement eligibility standards and current laws governing teacher pensions will not change.

Here is a link to the Illinois Supreme Court’s decision in this case:
Supreme Court's Decision

Extending the Illinois Income Tax to Pensions and Retirement Income

Updated: November 1, 2016

Issue: Currently, Illinois residents do not have to pay Illinois income tax on pensions and other retirement income. Various elected officials and public interest organizations have discussed changing the law to extend the income tax to pensions and all retirement income.

Discussion: No legislation is advancing in the General Assembly, but initial suggestions called for taxing pensions at 3.75 percent — which is the current state individual tax rate. It is estimated that extending the income tax to annual retirement income over $50,000 would raise at least $1.72 billion annually for the state according to the Civic Federation of Chicago. Most suggestions would not extend the income tax to “modest pensions,” but that term has yet to be defined.

Without any specific language it is difficult to fully analyze the concept. However, it is likely that extending the income tax to retirement income would be challenged in court as a violation of the Illinois Constitution’ Pension Protection Clause. It is likely that taxing retirement income will be very difficult to pass in the legislature because seniors are a large, politically active group of voters..


Updated: November 1, 2015

Issue: For more than three years, some members of the General Assembly have proposed a method of reducing the cost of state government’s public pension systems that they say does not violate the Pension Protection Clause of the Illinois Constitution – a solution that is based on the legal theory of “consideration.”

First advocated in 2012 by Illinois Senate President John Cullerton, any changes to the Illinois Pension Code reducing benefits and based on “consideration” would essentially be a consensual agreement between state government and the members of the public pension systems. Under this theory, both sides would have to receive something and both would give up something.

Discussion: The changes to the Pension Code being sought by state officials are designed to help lower the cost of the state’s public pension system to the state by reducing benefit levels. Many legislators say that the rising annual cost of the pension systems is siphoning tax resources away from other state spending priorities.

Because the Illinois Supreme Court has ruled that state government cannot enact laws that directly diminish or impair existing pension benefits, legislators are looking for a legal way to reduce benefits that does not violate the state constitution.

“Consideration” is a legal practice that is acknowledged in contract law. Under the theory advanced by lawmakers, changes can be made to the Pension Code and the constitutional protection of pension benefits waived if the pension system members agree to accept the changes in return for a benefit. The “benefit” for the members of public pension systems would be a solution to the financial problems faced by Illinois’ public pension systems and the long-term stability of the systems.

Under the initial “consideration” proposal, the state would give TRS members and other public employees three choices to consider in return for the financial stability of the retirement funds:

  • Keep the current 3 percent compounded cost-of-living adjustment at retirement, but in return lose all access to a government-subsidized health care plan. In addition, a member’s future salary increases would not be counted in the formula that calculates an initial pension.
  • Keep the current COLA, but delay the beginning of the COLA for three years. With this choice, the member also would begin paying 2 percent higher active member contributions to the pension system. The member would continue to have access to state-subsidized health care and continue to have all raises count in the initial pension calculation.
  • Change the COLA to 3 percent annually not-compounded, and the member would continue to have access to state-subsidized health care and continue to have all raises count in the initial pension calculation.

A second “consideration” plan, proposed in the spring of 2015, offered teachers and public employees a trade:

  • Keep the 3 percent compounded COLA and no future salary increases would be included in the initial pension formula.
  • Keep future raises in the initial pension calculation, but the member’s annual COLA in retirement would be half the inflation rate, with a 3 percent cap.

While the first “consideration” proposal was approved by the Illinois Senate, it never came to a vote in the Illinois House. The second “consideration” proposal has not yet been formally introduced as legislation in the General Assembly.

In either case, each member would cast a “ballot” registering his or her choice. If a member does not make a decision from the choices offered, the member would automatically be enrolled in one of the options selected by state officials.

Despite the insistence of proponents that using the “consideration” theory to reduce benefits would be constitutional, some labor unions representing teachers and public employees say any changes to the Pension Code based on “consideration” would still be challenged in court on the grounds that any reduction in existing pensions would be an unconstitutional diminishment or impairment of retirement benefits.

Ralph Martire Plan to Re–Amortize Illinois’ Pension Debt Over 44 Years

Updated: November 1, 2016

Issue: In January, 2013, Ralph Martire, executive director of the Center for Tax and Budget Accountability, proposed a multi–year solution to the state’s pension financing problem. The Martire Plan would replace the current 30–year payment plan with a 44–year payment plan. Essentially, Martire wants to re–finance state government’s pension “mortgage.”

Martire points out correctly that the biggest and essential part of the public pension problem in Illinois is the unfunded liability facing Teachers’ Retirement System and the four other state pension funds, estimated at $111 billion at the end of fiscal year 2015. The TRS share of this unfunded liability alone is $61.6 billion. Two–thirds or more of the state’s annual pension contribution is devoted to paying down the unfunded liability. The remainder is the cost of pension benefits earned by active teachers in that year.

Discussion: Martire’s proposal would “restructure” 90 percent of the $111 billion unfunded liability, or roughly $100 billion. All but 10 percent of the unfunded liability would be paid off by 2057, through equal annual contributions from state government. In 2013, Martire estimated the payment would be approximately $6.9 billion every year for 44 years.
Currently, state law requires the government to pay off the pension systems’ unfunded liability by 2044 by paying annual contributions. These contributions, however, increase in size annually until 2044. For TRS, the annual state contribution in fiscal year 2017 is $3.99 billion. It is scheduled to increase over the next 31 years to as much as $9.31 billion per year.
Legislators say that this continually rising “ramp” payment under the current law is too expensive and will re-direct money from other state budget priorities.
A TRS Board of Trustees’ resolution of 2012 calls for an actuarially-sound plan to pay off the unfunded liability. This means that:

  • Normal actuarial practice calls for a 30–year payment plan. State law has required a 50–year plan and this proposal would be a 44–year plan.
  • Normal actuarial practice calls for pension system to be 100 percent funded — to carry no unfunded liability. State law has required a 90 percent target, which would continue under this plan.
  • Along with the annual payment toward the unfunded liability, the state also must pay the annual cost of pensions earned in that year. For TRS alone, that cost was roughly $1.1 billion in 2014 and it will grow to $3.1 billion by 2045.

The state also would have to pay an annual amortized contribution to help pay off the 10 percent unfunded liability that is left over under the Martire plan, further increasing the state’s total pension contribution.

Defined Benefit Retirement Plans vs. Defined Contribution Retirement Plans

Updated: November 1, 2015

Issue: An on-going debate in Illinois state government revolves around the question of whether Defined Contribution retirement plans (DC plans) are more efficient and cost effective for governments to operate as opposed to Defined Benefit retirement plans (DB Plans). Most government-sponsored retirement plans are DB plans.

In the past few years, legislation has been introduced in the General Assembly that would close the state’s five DB plans for all active members and immediately place those members in a DC plan operated by state government. All active members, upon retirement, would receive a DB pension benefit based on the service and funds accumulated up to the date that the DB plans were closed, in addition to distributions from the DC plan. Retired members would continue to receive only the current DB benefit.

A government Defined Benefit plan 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 in retirement, regardless of how much the member and employer contributed to the trust fund for that member. Active members and the employer supplement the benefit payments of retired employees. Members cannot outlive their benefits. The calculation of the annuity is proportionally equal for all participants.

  • A government Defined Contribution 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. 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 their benefits.

Discussion: In general, multiple studies over the last decade show that government-run DC plans are not more efficient or cost effective than government-run DB plans.
Closing a DB Plan and replacing it with a DC Plan provides a smaller benefit to retirees than a DB Plan, costs more than a DB Plan, does not save the government money and results in weaker investment returns for members and could result in active members being enrolled in Social Security and paying FICA taxes. Here is a look at the various issues in the DB vs. DC debate:

Existing Public DC Plans in the 50 States

  • “About 11 percent of public sector workers are currently covered by something other than a traditional defined benefit plan.” (CSLGE – 2014)
    • At the end of 2012, 98 percent of public employees were covered by a retirement plan with some element of a DB plan. 89 percent were covered by a DB pan only; 7 percent were covered by a hybrid plan; 2 percent by a cash balance plan; and 2 percent by a defined contribution plan only. (CSLGE – 2014)
  • Between 1947 and 2013, 21 states created 33 retirement plans with a DC plan component for at least one segment of public employees. Twelve of these plans are optional for members, 21 are mandatory. Twenty-two of these plans contain a guaranteed lifetime pension found in a DB Plan and 11 do not contain a DB plan element. (CSLGE – 2014)
    • “…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)
    • Nine states created mandatory “hybrid” plans that include a DB-style pension component: California, Georgia, Indiana, Michigan, Oregon, Rhode Island, Tennessee, Utah and Virginia.
    • Seven created optional DC plans that do not include a DB-style pension component: Colorado, Florida, Montana North Dakota, Ohio, South Carolina and Utah.
    • Five created mandatory cash balance plans that include a DB-style pension component: Kansas, Kentucky, Louisiana, Nebraska and Texas.
    • Two created optional hybrid plans that include a DB-style pension component: Ohio and Washington.
    • Two created mandatory DC plans with no DB-Style pension component: Alaska and Michigan.
  • “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)

Two states have switched back from a DC Plan to a DB Plan.

  • West Virginia’s Teacher Retirement System was a DB Plan from 1941 to 1991, when the plan was closed to new members and new hires were placed in a DC Plan. In 2005, the DC Plan was closed and all members were switched 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)

DC plans do not provide the same level of retirement security for members as DB plans.

  • 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)
  • “Unlike in DB plans, where workers receive regular monthly pension payments, in DC plans it is typically left to the retiree to decide how to spend down their retirement savings. Research suggests that many individuals struggle with this task, either drawing down funds too quickly and running out of money, or holding on to funds too tightly and enjoying a lower standard of living as a result.” (NIRS – 2014)
  • “Under the traditional defined benefit plan, participants are promised a return of about 8 percent. Under any defined contribution arrangement, workers will receive whatever returns the market offers, which could well be less than 8 percent…So benefits have been reduced with the introduction of defined contribution arrangements…

    “…moreover, most of the recent efforts have been a move to either hybrid plans, with a mandatory defined contribution and defined benefit component, or to cash balance plans, where participants are guaranteed a return of 4 or 5 percent.” (CSLGE – 2014)

  • 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)>
  • At the end of 2013, the average 401(k) balance across the nation was $72,383. That’s not much to live on if a person lives 15 years in retirement. The median account balance was $16,649, which means half of the people with 401(k)s had less than that in their accounts. (ICI Research Perspective -- 2014)
  • 401(k) account balances vary by age with higher balances held by people closer to retirement. The average balance for a working person in his or her 50s with 10-to-20 years of contributions to the account was $123,777 at the end of 2013. For someone in their 50s with 20-to-30 years of contributions, the average balance was $211,424. (ICI  Research Perspective – 2014)
    • “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)
  • 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)
  • In Michigan, 15 years after the closing of a DB Plan and a switch to a DC Plan for new hires, the older DB Plan members received an annual benefit of $30,000. The DC Plan members approaching retirement had accumulated an average of $123,000 in their accounts, creating an annual retirement income of $9,000. (Pension Review Board – 2012)
  • 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)

Closing a DB Plan and converting the retirement system to a DC Plan raises costs for the sponsoring government.

  • Closing all five state public DB Plans in Illinois and transferring members to DC Plans would not eliminate the $172.2 billion in obligations to teachers and public employees that have accumulated through fiscal year 2014. Those obligations include an unfunded liability of $101.2 billion. Those obligations have to be paid. (COGFA – 2014)
  • 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 $101 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.
  • 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.
    • 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.
    • “…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)
  • Studies consistently show that DB plans cost less to administer than DC plans and are more efficient.
    • “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)
  • 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)
  • DB Plan investment returns are stronger than DC Plan investment returns.

    • “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 2013 report from CEM Benchmarking finds that DB pensions outperformed DC plans in average by 99 basis points, net of fees, over the 17 years ending in 2013 – 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)
    • “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)
    • Between 1995and 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)
    • DC Plans have higher administrative and investment fees.
      • “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)
    • “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)
    • DC Plan investment decisions are made by the member; DB Plan decisions are made for a pooled fund by 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.
      • “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)
    • 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.
    • Because the size and distribution of retirement benefits from DC plans are dependent on decisions made by each member, there is no standard retirement benefit to measure against the “safe harbor” limit, so it is likely that the Social Security Administration would enroll all DC plan members and require teachers and school districts to pay the FICA tax.
    • The reportable earnings of TRS members in fiscal year 2014 were $9.3 billion, so total FICA taxes paid would have been approximately $1.25 billion. School districts would have been responsible for $625.5 million of that tax payment.  


    • 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 TribuneAre 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

Facing Old Problems of Pension Funding and Guidelines for Improving Illinois Pension Finances

Updated: November 1, 2016

Issue: The TRS Board of Trustees on March 30, 2012 approved a resolution which acknowledged that due to evolving circumstances that call into question the General Assembly’s ability to meet the existing statutory plan to fund TRS, drastic changes are needed to maintain the long–term viability of TRS and the other state pension systems.

Discussion: The Trustees directed TRS Executive Director Dick Ingram to inform TRS members, organized labor, legislators and other government officials that growing state budget deficits could lead to insolvency for TRS unless meaningful changes are made in the current pension funding mechanism. There are five key elements to “meaningful” pension reform.

According to projections from the Governor’s Office of Management and Budget, the state’s budget deficit is approximately $8 billion in fiscal year 2017 and may grow to $14 billion in a decade without systemic changes to the state’s fiscal practices. Pension costs are expected to grow by 73 percent during this period of time to $16.3 billion.

This bad budget news is putting real pressure on legislators to make substantial cuts in the state’s budget, which in FY 2015 totaled $69.8 billion. One target many legislators have mentioned is a reduction in the statutorily–required contribution to the state’s pension systems. (The TRS share of that contribution in fiscal year 2017 is $3.99 billion.)

Prior to 2012, TRS always operated under the assumption that state government would follow the law and make its entire annual payment to the System. But for the last several years, given the position of state finances this assumption is no longer a certainty.

Sample “stress test” scenarios calculated in 2016 show that if the state reduced its annual contribution to TRS in the future and investment returns are less than estimated, under the worst option TRS would become insolvent in 2036 when benefit obligations would exceed assets. Under the best option TRS “treads water” indefinitely with less than 60 percent of the assets needed to pay its long–term obligations. Here are three sample stress tests:

  • The TRS FY 2018 contribution of $4.56 billion is paid in full and that contribution level grows by 2 percent in each year thereafter, TRS is less than 60 percent funded in 2045, but “treads water” indefinitely
  • If only 75 percent of the TRS FY 2018 contribution of $4.56 billion is paid — $3.42 billion — and that contribution level grows by 2 percent in each year thereafter, and long term investment returns are 6 percent instead of the projected 7 percent, then TRS is insolvent in 2040
  • If only 75 percent of the TRS FY 2018 contribution of $4.56 billion is paid — $3.42 billion — and that contribution level grows by 2 percent in each year thereafter, and long term investment returns are 4 percent instead of the projected 7 percent, then TRS is insolvent in 2036

In order to keep TRS solvent over the long–term, the TRS trustees have said that meaningful reform of pension financing must be enacted to better balance expected revenues and anticipated benefit costs. The five key elements to pension reform are:

  1. Use only actuarially based math to determine contributions and liabilities. The Illinois pension math dictated in the pension code artificially lowers the state’s cost of funding pensions. These laws supersede the true calculation of the state’s annual pension contribution. We need to calculate the cost in the way the rest of the world does it. Here is a breakdown of the differences:

Illinois “Political Math”

  • The state’s goal is to have only 90 percent of the assets on hand to pay all future obligations and maintain a 10 percent unfunded liability
  • The state’s annual contribution is reduced each year by the amount of debt service needed to pay off the bonds sold over the course of the last decade to finance the state’s annual contribution
  • The state’s goal is to reach 90 percent funding in 50 years
  • Future savings over several decades from reform measures are counted now before they are actually realized
  • Total state contribution for TRS in fiscal year 2016: $3.74 billion

Standard Actuarial Math

  • The state’s goal would be to retire the unfunded liability and have 100 percent of the assets on hand to pay all future obligations
  • The state’s annual contribution is not reduced each year by the amount of debt service needed to pay off the bonds sold over the course of the last decade to finance the state’s annual contribution
  • Obligations are amortized over a 30 year period
  • The annual cost of pensions to the state is based on what is needed to fund pensions now
  • Total state contribution for fiscal year 2016: $4.37 billion
  1. Illinois must enact funding guarantees for the pension systems into law. A statutory funding guarantee ensures that all future state government contributions are made in full when they are due. Most other states operate with these guarantees and in Illinois, the Illinois Municipal Retirement Fund benefits from this type of mandated payment.
  2. The financial inequities of the Tier II funding and benefit structure must be fixed. Current law requires Tier II members to pay 9.4 percent of salary. That contribution fully funds Tier II benefits and subsidizes Tier I benefits. The Tier II contribution is 50 percent higher than the Tier II benefit’s value, which is 6 percent of their pay. In 20 years, when Tier II members are a majority in TRS, the subsidies they pay may cause a reduction in the state’s annual contribution. Eventually, the state will not owe any annual contribution to TRS because the members will be paying the entire cost. This is fundamentally unfair to Tier II members.
  3. Any solution enacted by the General Assembly must be uncomplicated and easy to understand and administer.
  4. Any solution must adhere to the Illinois Constitution’s Pension Protection Clause. Article XIII, Section 5 of the Illinois Constitution reads: “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

Illinois Teachers and Social Security

Why Illinois Teachers Aren’t in Social Security

Updated November 1, 2016

Issue: Illinois teachers are not, and never have been, participants in Social Security. And even if TRS members do pay into Social Security through other employment and build up credit in the system, the resulting Social Security benefit in retirement is reduced because the member is receiving a TRS pension.

Many people wonder why Illinois teachers are not in Social Security. There is also a school of thought that says placing Illinois teachers in Social Security would reduce the state’s costs and obligations to TRS members.

Discussion: When Social Security was created in 1935, all state and local government employees across the country, including public school teachers, were prohibited from participating in the program because of constitutional concerns about levying a federal tax on state governments.

Because many government employees around the country did not have stand-alone pension plans like TRS, in 1950 Congress amended the Social Security Act to allow state and local government employees, including teachers, to voluntarily participate in Social Security — but only if they were not covered by another stand-alone retirement system like TRS. Illinois teachers have been TRS members since 1939.

All 50 states signed agreements with the Social Security Administration to permit these uncovered government employees to enter the system, but it was left to each state to decide which government employees would be covered by Social Security. In 1954, the Social Security Act was amended again to allow state and local government employees, except police and firefighters, to participate in the system even if there were covered by a stand-alone retirement plan like TRS.

At that time teachers in Illinois and 14 other states did not push for participation in Social Security for three main reasons:

  • Participation in Social Security would have required teachers and their local school district to pay an additional tax to Social Security; increasing costs to taxpayers.
    • Currently, teachers pay 9 percent of their salary and school districts pay 0.58 percent of its teachers’ salaries to TRS. The federal Social Security tax is 12.4 percent, split evenly between the employee and the employer. For school districts, placing teachers in Social Security would result in a 137 percent increase in total taxes and contributions devoted to retirement. TRS members would see their total retirement contribution rise to 15.2 percent of pay, a 68 percent increase.
  • Teachers' Retirement System retirement benefits were significantly better than those offered under Social Security.
    • That is still the case. The average TRS benefit in fiscal year 2016 was $54,252. The average Social Security benefit in 2016 was $16,260.
  • It would not save taxpayers money to place Illinois teachers in Social Security and correspondingly reduce TRS benefits and contributions.
    • Along with the increased cost to local governments for Social Security, adding teachers to the system would not wipe out the $118.6 billion that TRS currently owes all active and retired TRS members for the next 30 years. These are retirement benefits that already have been earned. Of that $118.6 billion, $71.4 billion is not covered by existing assets and still must be funded. The cost to state government of paying down this unfunded liability is currently about $3.59 billion per year.

Until the mid–1980’s, teachers were allowed to receive both TRS benefits and full Social Security benefits earned from other employment. TRS members whose primary employment was as an educator not covered by Social Security had their Social Security benefits calculated as if they were long–term, low–wage workers.

Congress, however, saw these Social Security collections as a “windfall,” and passed the Windfall Elimination Provision in 1986. The WEP automatically lowers Social Security benefits for most retired TRS members unless the member accumulated 30 years of “substantial earnings” in other employment — essentially holding a second full–time job while being a full–time teacher. 

In addition, Congress passed the Government Pension Offset to remove a similar perceived advantage from TRS members collecting Social Security benefits as a “dependent” of their spouse. The GPO automatically reduces the benefits a TRS member could normally expect to receive from a spouse’s participation in Social Security. Spousal benefits were originally designed to protect stay–at–home parents.

For more information on WEP and GPO, check the Social Security website:


Placing Illinois Teachers in Social Security

Updated: November 1, 2016

Issue: Requiring newly–hired Illinois teachers to become part of Social Security would help ease the burden on TRS, lower the state’s contribution to public pension systems, help ease the long–term financial problems facing Social Security, and create more income stability for retired teachers.

Discussion: Making newly–hired teachers pay into Social Security and allowing them to be eligible for benefits would affect all current and retired teachers.

Illinois teachers have never been part of the Social Security system. Most teachers rely almost solely on a TRS pension during retirement. Active teachers contribute 9 percent of their paycheck to help fund TRS and school districts contribute 0.58 percent of every teacher’s salary to the System. Last year, all told, teachers contributed $951.8 million to TRS and school districts contributed $148 million.

For new teachers to become part of Social Security this scenario would mean a mandatory 12.4 percent payroll deduction split evenly between the member and the employer, which in the case of Illinois teachers is school districts and state government. Teachers would still be required to contribute 9 percent of salary to TRS.

For school districts, the cost of teacher pensions would immediately rise by a considerable amount. Instead of contributing 0.58 percent per new teacher, every district would have to contribute 6.2 percent per teacher. It is estimated that this increased cost would equal $629 million for Illinois school districts in the first year. Districts would still have to contribute 0.58 percent for each participant in the current system.

A 1999 study by the General Accounting Office found that adding teachers and other public employers from around the country who are not currently in Social Security would create, at best, a temporary surge in revenue for Social Security. Over the long term, adding teachers to Social Security would only increase the System’s total obligations and deepen the program’s long–term funding problem.

The “Cost Shift:” Public Schools Paying More of the “Normal Cost” of Teacher Pensions

Updated: November 1, 2016

Issue: A proposal discussed by state government for many years would require all school districts outside of the City of Chicago to pay a greater share of the annual cost of pensions for TRS members.

Discussion: Currently active teachers, school districts and state government split the cost of what is owed each year to retired TRS members, as well as the cost of benefits for future retirees. These contributions are supplemented by TRS investment income. The proposal would not affect teacher contributions, but would require school districts to pay a greater share of the pension cost due each year – what is called the “employer’s normal cost.” School districts assuming these costs would alleviate the state from paying current costs. The state would be responsible only for paying down the TRS unfunded liability. Estimates indicate that in fiscal year 2016, annual school district contributions would have risen from a total of $148 million to more than $1.47 billion, while the state’s annual contribution would drop from $3.99 billion to $2.9 billion.

House Speaker Michael Madigan, D–Chicago, Senate President John Cullerton, D–Chicago, and Chicago Mayor Rahm Emanuel have said they do not believe it is fair that suburban and downstate school districts do not pay more of what is owed in a given year to retired teachers. They note that in the City of Chicago, a larger share of the annual cost of teacher pensions each year is funded by a property tax levy in the city — about 18.6 percent, compared to 2.3 percent in the rest of the state. Under legislation first proposed in the spring of 2012, suburban and downstate school districts would be increasingly responsible, over a number of years, for paying an increased share of the annual costs of TRS pensions and the state would pay less toward these costs. Eventually, school districts would be responsible for paying the entire annual cost of benefits being earned every year.

Shifting the annual cost of pensions to local governments does nothing to lower the costs of teacher pensions for taxpayers. The proposal is just a transfer of responsibility for pension costs from a larger group of taxpayers to a smaller group of taxpayers. The cost of the pensions remains the same. The shift means that the annual cost of pensions for a particular school district’s teachers would not be spread out statewide among millions of taxpayers, but only spread among thousands of people who live in that school district, much like the way municipalities pay for the pension costs for police and firefighters.

TRS Operations

Pension Protection Clause of the Illinois Constitution

Updated: November 1, 2015

Issue: In 2015 a unanimous Illinois Supreme Court upheld the Pension Protection Clause in the Illinois Constitution of 1970.

Pension benefits and contributions for existing teachers and government employees are guaranteed by Article XIII, Section 5 of the Illinois Constitution, known as the “Pension Protection Clause.”

Article XIII, Section V of the Illinois Constitution, “Pension and Retirement Rights,” states:

“Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

Because of Illinois’ on-going budget deficit, public pension critics argue that retirement benefits to teachers and government employees should not be guaranteed by the constitution, while the supporters of public pensions say that pension benefits are a promise that should be kept.

In the past, a central focus of this debate were differing interpretations of the Pension Protection Clause. Pension supporters said the language of the constitution was clear and that all current public pension benefits cannot be diminished or impaired. Pension critics suggested a different interpretation; that the constitution did not protect retirement benefits not yet earned. They said pension benefits for active TRS members could be left intact for service performed through a date certain, but reduced for future service after that date that is not yet performed.

Discussion: On May 8, 2015, a unanimous Illinois Supreme Court upheld the literal meaning of the Pension Protection Clause. The Court said that Clause cannot be interpreted to include any qualifications or meanings that are not part of the plain language of the clause.
The case before the Court, Heaton v. Quinn, was a challenge to a 2013 state law that changed the Illinois Pension Code and lowered retirement benefits for the members of TRS and all state pension systems. State officials argued that the Pension Protection Clause could be suspended by the state’s duty to use its “police powers” to override the constitution and take action to solve a systemic and “dire” financial problem the state has faced for years. The Supreme Court disagreed and said:

“…accepting the State’s position that reducing benefits is justified by economic circumstances would require that we allow the legislature to do the very thing the pension protection clause was designed to prevent it from doing…

“Rather, it is a statement by the people of Illinois, made in the clearest possible terms, that the authority of the legislature does not include the power to diminish or impair the benefits of membership in a public retirement system. This is a restriction the people of Illinois had every right to impose.”

The Court’s decision in Heaton v. Quinn means that the pension laws in place at the time a public employee begins government service control his or her pension benefits forever. Those benefits can be increased or enhanced, but they cannot be diminished or impaired.

Pension Payment Guarantee in Illinois Law

Updated: November 1, 2015

Issue: In recent years, the Civic Committee of the Commercial Club of Chicago has said that pensions due to Illinois teachers and public employees are not guaranteed by the state; implying that if a state pension system, such as TRS, goes broke, retirees have no recourse to collect the money owed them. The Civic Committee cited the Illinois Pension Code – 40 Illinois Compiled Statutes 5/22-403 – as saying that “any pension payable under any law herein before referred to shall not be construed to be a legal obligation or debt of the State…”

Discussion: The pensions of all TRS members are guaranteed by the State of Illinois.

In its argument, the Civic Committee does not quote the entire law when referencing the Illinois Pension Code and leaves out important language. The entire clause reads:

“…any pension payable under any law herein before referred to shall not be construed to be a legal obligation or debt of the State unless otherwise specifically provided in the law creating such fund.”

In other words, the language in another state law creating a pension fund can override this section of the Illinois Pension Code.
For Illinois teachers, the section of the Pension Code cited by the Civic Committee is overridden by 40 ILCS 5/16-158(c), a part of the law that created TRS in 1939. This section specifically states:

“Payment of the required State contributions and of all pensions, retirement annuities, death benefits, refunds, and other benefits granted under or assumed by this System, and all expenses in connection with the administration and operation thereof, are obligations of the State.”

Under state law, the payment of TRS Pensions is an obligation of the State of Illinois.

In addition, Article XIII Section 5 of the Illinois Constitution protects “membership” in any state pension system as an “enforceable contractual relationship.”