Pension Blues

Cary Nelson

It’s no secret that public employee pensions are under political and legislative assault throughout the country. The effort in state capitols is being promoted by conservative think tanks that provide allied senators and representatives with model legislation that either demolishes or degrades existing pension systems. Indeed it is clear from increasing ideological attacks on public employees generally that the emerging pension wars are certainly not just an effort to fix budget shortfalls. They are part of a national political agenda to discredit and impoverish a critical segment of the American workforce.

That trend follows years of private manufacturing industry concessions in which pensions were reduced in declining industries in a tradeoff to keep more people employed. But higher education is not a declining industry. There is no shortage of students seeking a college degree.

Public university employees in Illinois have long had one of the better pension formulas in the country, even while the system has been illegally underfunded. It is not the best formula, but it has been competitive. We have credited faculty in the traditional defined benefit program with 2.2 % of their averaged four highest years of consecutive income for each year of service. California uses a multiplier of 2.4%. We have raised retiree pensions by 3% a year compounded. Some systems either have a higher cost of living adjustment or have a trigger to increase their COLA in response to hyperinflation like we experienced in the 1970s. We do not. Still, our defined benefit system has been competitive. No longer.

On April 14, 2010, Public Act 96-0889 went into law in Illinois. It created a two-tier pension system, with drastically reduced benefits for faculty hired on or after January 1, 2011. Now legislative proposals are on the table to coerce current faculty into accepting benefits similar to the Tier 2 model that already applies to more recent employees. Here are some key elements of Tier 2:

–Until now, contingent employees and tenure track faculty who worked for five years and left or were denied tenure could collect Illinois benefits years later. Now the minimum period before being “vested” in the system is ten years. Tough luck if you are denied tenure. You are stripped of your retirement benefits as well as your job.

–Under Tier 1 you could retire at any age without having your benefits reduced if you had 30 years of service; Tier 2 raises it to age 67, a huge change. You could retire at age 62, but your pension would be cut by a whopping 30%.

–Under Tier 1 the earnings base from which your average salary was calculated was your four highest consecutive years. Tier 2 pegs it as the average of 8 consecutive years out of your last 10. The result will be a considerably reduced retirement income.

–Tier 1 retirees get an annual increase of 3% compounded. Tier 2 employees get half of the consumer price index or 3%–whichever is lower! And, unlike Tier 1, Tier 2 annual increases will not be compounded. Tier 2 retirement income will not keep pace with the rate of inflation. For example: a Tier 1 retiree with a $50,000 pension in year 2000 would have seen it grow to $67,000 in 2010. A Tier 2 $50,000 pension would only be worth $55,000 in 2010. Add another decade or a higher starting pension, and the spread is still greater. You may live long, but you will not prosper.

–Tier 2 retiree final average salaries (from which a defined benefit pension is calculated) are capped at $106,800 for 2011. The cap grows at the lesser of 3% or one-half the consumer price index. What this means in practical terms is that once you reach the cap, the purchasing power of your retirement income will never increase. Indeed it will decline, no matter how much your salary increases. That outside offer may add to your salary, but it will have no impact on your pension. It is an open invitation for Illinois faculty to move elsewhere once they reach the cap. It categorically undermines the effort to retain distinguished senior faculty.

Those of us who follow faculty benefits used to promote the reasonably competitive Illinois defined benefit plan as part of faculty recruitment efforts. No longer. I now advise against signing up. The best advice to new faculty: put as much money in your personal savings account as you can. The state is no longer interested in your future.

It remains to be seen how many Tier 2 or similar conditions can be legally imposed on current faculty. Certainly there are constitutional bars to reducing benefits for current employees. But the governor has tried to structure the change as an individual  “choice” so as to do an end run around the state constitution. The issue will end up in the courts. Meanwhile, retiree health insurance costs are now guaranteed to increase. It is time faculty members across the state organized to have real impact on the legislature.

In one respect at least Illinois has long been unique, holding pride of place as the most drastically underfunded large public employee pension system in the country. The Illinois legislature has long ignored the constitutional requirement to contribute its share to the system, instead treating our pension system as if it were an unregulated piggy bank to borrow and steal from at will. Now they want university employees to pay for their legislative malfeasance—by paying more to receive less. It is important to promote that argument because it represents the truth. But it is not going to carry the day on its own. Nor will university presidents be able to shift the political tides against us. They can monitor and lobby all they want, but they simply do not have the political power or influence to resist destructive legislation that has support from both major political parties. A yellow school bus filled with university presidents might just as well turn around and head for home before it gets to Springfield.

Meanwhile, a UIC Vice Chancellor’s and Provost’s web site disingenuously suggests a union cannot help matters because the campus administration does not bargain over state benefits. They are set by the state. But the very Achilles heel that hampers administrative lobbying in Springfield—the lack of political clout—can be achieved by a coalition of public employee unions with numbers, political influence, and enough funds to support legislators who support state employees. University faculty need a strong voice in such a coalition, one that gives voice to the key issues that impact research institutions. The coalition already exists, but it needs a stronger research university faculty presence. Our colleagues in Chicago have taken the first step by organizing with the AAUP and the AFT. Other campuses should follow. For no one campus faculty on its own can tackle the job of winning back the benefits that have been drastically eroded and face further destructive legislation still.

Cary Nelson is national president of the American Association of University Professors.