Nearly 30,000 Chicago teachers are caught in pension trap

Half of retired Chicago pensioners make more than average working Illinoisans, but nearly 30,000 teachers won’t be eligible for more than a contribution refund.

Chicago teacher pensions leave nearly 30,000 teachers without access to benefits and the Illinois General Assembly’s solutions not only won’t help, they’ll likely make things worse.

What most retirees really need is flexibility.

The Public School Teachers’ Pension and Retirement Fund of Chicago recently released its annual actuarial report. It highlights why pensioners need more flexibility – not boosted benefits – to secure their retirements.

1) Nearly 30,000 former teachers aren’t eligible for retirement benefits

By nature, a pension fund is designed to serve career workers, or people who spend about 20 years in one job. That doesn’t align with the journey of many educators.

Most teachers have to work at least 10 years to be considered eligible for their pension, though that can vary slightly based on age and start of employment. If they have met that minimum vesting threshold, the teacher can defer those pension benefits to a later date. That means a Tier 2 teacher, hired after 2010, who leaves the profession at age 37 with 15 years in the classroom will have to wait another 30 years to get access to a pension.

If they left after eight years, their only option would be a refund of whatever money they deposited. None of the employer’s contributions would follow them.

Wage and salary workers in the public sector today have a median tenure of 6.2 years. That number is likely skewed because 3-in-4 government workers are aged 35 and older. Younger workers tend to stay in jobs for shorter periods. Across the public and private sectors, the median tenure of workers 55 to 64 is 9.6 years and 2.7 years for workers 25 to 34. Both figures are far below the 10-year vesting requirement for Chicago teachers’ pensions.

Right now, only 7,135 inactive members are eligible for deferred pension benefits. The other 29,793 inactive members are only eligible for a reimbursement of their contributions, meaning they did not hit that minimum 10-year threshold.

When they became inactive, they had worked an average of 1.69 years and had an average age of 33, a Freedom of Information Act request showed. There were 70% of them under the age of 34. Some may return to work for the remaining time needed to get a pension, but many others will have no choice but to accept the refund.

Even for teachers who barely meet the minimum 10-year threshold, a pension-only system is not ideal. Their benefits will be based on a much lower salary than career teachers. Pensions are designed for people who are planning to spend 20-plus years in one career.

If these teachers had options going into their career, as do employees of the State University Retirement System, they could have chosen a 401(k)-style plan from their employer. That would have allowed them to invest that money themselves and keep their employer match when they left the system after a much shorter vesting period of five years.

2) Without any change, this pattern will continue: 52% of active members are not vested

Out of 34,647 active members, only 16,718 are currently vested. That’s nearly 18,000 current teachers who, depending on their future career plans, might only be able to get a fraction of what they could have had with a portable plan.

This isn’t just a problem for younger workers. Out of 1,071 active employees aged 65 and older, over 500 of them are not pension eligible. If they don’t continue working, their only option is a refund.

Older workers might start teaching as a second career, and desire greater flexibility for when they can finally retire completely. They deserve the flexibility to choose a retirement plan that works for them, their goals and financial needs.

While public-sector workers do stay in their positions for longer than private-sector employees, turnover remains high, as is evidenced by the data on median tenure. Potential Illinois pension benefits may be generous, but only a fraction of newer, public-sector workers will receive them because of steep eligibility requirements. Many will leave with nothing but a refund of their contributions.

But the solutions proposed in Springfield aren’t targeting the right problems. They could harm retirement security.

3) Benefit boosts aren’t necessary; Chicago Public Schools already offers great retirement benefits.

The average working Illinoisan makes just under $70,000 per year. Teachers in the Chicago Public Schools system are doing better than that, with an average annual salary of $84,796.

That high pay continues into retirement. Of the teachers currently receiving retirement benefits from the Chicago teachers’ pension system, 48% are getting over $72,000 per year.

Yet public sector unions have been pushing for enhancements to benefits by raising the maximum amount of salary considered for retirement benefits, lowering the retirement age and raising the cost-of-living adjustment. As far as the maximum pensionable salary is concerned, that sort of reform would only help teachers already making six figures in retirement – more specifically the 1,036 retirees already receiving annual benefits over $126,000 a year. As for a lower retirement age and a larger cost-of-living adjustment, that’s not doing anything to help the short-term workers who don’t stay long enough to receive any benefits at all.

A raised cap would also add more debt to a pension system already saddled with $14.2 billion in unfunded liabilities and only about 50 cents on hand for every dollar owed.

At nearly $50,000 in pension debt per student, Chicago has the highest debt-to-student ratio in the state. It is far beyond the state’s No. 2 with at $6,289 of debt per student, DeSoto Consolidated School District 86.

Illinois pensions sometimes get low ratings. That’s not because of poor benefits; it’s because of fiscal instability.

With automatic cost-of-living adjustments that measure up against inflation and a yearly benefit that can be expected to replace over 70% of a worker’s final salary, the Illinois pension systems provide great benefits for long-term workers. However fiscal irresponsibility and a low funding ratio make the odds of receiving those benefits uncertain.

Adding further debt compromises the health of the pension system, putting future retirees at risk.

Short- and medium-term workers need flexibility and mobility, both of which are incompatible with a defined-benefit pension. Lawmakers would do better to pursue reforms that help more Chicago teachers with more retirement flexibility – whether that is a defined contribution plan or expanded buyout options – rather than boosting benefits.

After all, workers may not stay long enough to receive a pension. And for those who do, more debt reduces the chances they will ever see a dime.