Experts explain the impact of pension changes
Some details on the new pension bill remain to be worked out, and its future hinges on a likely court challenge.
In the meantime, we turned to some University of Illinois experts to try to explain the impact on university employees:
Whom does it affect?
Anyone who is part of the state's defined-benefit pension plan, under which employees contribute about 8 percent of their earnings and the state guarantees a specific annual retirement benefit, or annuity. This is in place of Social Security benefits.
The plan reduces the employee contribution from 8 percent to 7 percent, but UI officials say that won't offset benefit cuts in other areas.
Does it apply to employees in the self-managed (defined-contribution) plan through the State Universities Retirement System?
No. That's because the self-managed plan, similar to a 401(k), does not include annuities or other benefits payable directly from the retirement system, according to SURS. Rather, employees invest their money and the state's contribution in a set of annuities or mutual funds through Fidelity and TIAA-CREF.
Even the changes in the retirement age (for workers 45 and younger) don't apply, said Avijit Ghosh, senior adviser to UI President Bob Easter. Government rules impose penalties for withdrawing the money before age 59, but employees control those assets and can move them to another 401(k)-type account if they take a new job. "They just get whatever they've accumulated at the point of their retirement," Ghosh said.
Overall, SURS has 202,354 members in its defined benefit plan and 18,707 in its self-managed plan, both retirees and current employees, according to spokeswoman Beth Spencer.
When does the new law take effect?
July 1, 2014.
How will annual cost-of-living changes be affected?
Rather than the 3 percent annual increases guaranteed for retirement annuities now, the state will apply a formula based on years of service and inflation. The 3 percent increase will be applied only to a portion of the annuity, and it will not be compounded. The formula multiplies the years of service by $1,000, and the increase is applied to that portion of the annuity. For example: a worker with 30 years of service would get a 3 percent increase on $30,000, or $900.
If a worker's pension is close to $30,000 (from roughly a $45,000 annual salary), the effect will be small. But the UI has many employees earning more than that who will receive pensions of $40,000 to $50,000 or more, so they will lose much more. And employees with fewer years of service will see smaller increases as well. The fear is that inflation will eat away at benefits, especially for employees who live longer after retirement.
Depending on their age, current employees will also not receive the cost-of-living adjustment in up to five of the first 10 years of their retirement. Those age 50 and over will miss one year, those 47 to 49 will miss three years, those 44 to 46 will miss four years, and those 43 and under will miss five years.
Will the changes in the cost-of-living formula be applied to current retirees?
Will the new law affect when I can retire?
Yes, if you are 45 years old or younger. For each year an employee is under age 46, the retirement age increases by four months (up to 5 years).
Whom will the salary cap hurt?
Pension benefits will be calculated on only the first $110,000 of salary, the current cap applied to a lower-cost Tier II pension plan for employees hired after Jan. 1, 2011. Employees who earn more than that now will have their current salaries grandfathered in, but the pension cap disregards future salary increases for them and anyone who exceeds that limit in the future.
Most affected will be top administrators as well as faculty in business, engineering, law, medicine and the sciences, which pay higher market-based salaries. The UI estimates there are up to 2,600 people earning above the cap on its three campuses, but roughly 800 of those are in the self-managed plan. Pension expert Jeffrey Brown said it could cut some employees' benefits by up to 50 percent — on top of the losses from other changes in the bill.
Will the university make up for that somehow?
The UI is considering a supplemental retirement package under which employees could contribute money to a retirement account with a matching contribution from the university. How the university would fund that is still under study. Ghosh said it will take some time to develop, and couldn't say whether it might be in place before July 1.
How would the state's new defined contribution option work?
Under the bill, up to 5 percent of participants in the Tier 1 plan will be allowed to switch to a defined-contribution option, on a first-come, first-served basis, Ghosh said. But employees will not simply be allowed to switch to the self-managed plan operated by SURS, as some were hoping, he said. The state will set up a separate plan with different contribution levels, terms and conditions, he said. For example, the exact contribution from the state will vary each year, with a floor of 3 percent, rather than higher levels provided now, he said.
Whom does the new plan hurt the most?
That's open to interpretation, but UI officials say younger employees with a high earnings potential have the most to lose. They will have to wait longer to retire, see less of their salary applied toward their pensions and receive lower cost-of-living raises when they do begin drawing a pension.
When will the university or SURS provide more information?
SURS plans to put together a summary of the legislation and a FAQ for its members on its website soon. Both SURS and university officials say they want to understand all the ramifications first. A town hall meeting is also a possibility, according to UI spokesman Tom Hardy.
What should I do in the meantime?
Wait until SURS and the university can clarify the new rules, Ghosh said. Some people who are close to retirement are wondering if they will gain anything by retiring before July 1, but "I'm not sure at all if that is the case," he said.
Employees should seek advice from the retirement system about their own situations, Hardy said.
"The biggest message right now is don't jump to any conclusion about your own retirement plan," Ghosh said.