Illinois Teacher Pensions

[The Don]

Between $40 and $60 thousand a year for a considerable time, you have 20 years more to contribute, and you fear that will not fund a comfortable retirement? You'll need at least $3M?

That seems high to me, especially given the free health care you'll enjoy during your retirement. Health care costs (health insurance costs actually) represent a significant cost for retiree's over here.

Do you believe you'll need $3M because the cost of living where you intend to retire is so high, or are you retiring young and living long?

I'm honestly curious. I don't have an analogous situation. I have never had to consider my retirement savings in the same way most Americans do. I have a defined benefits pension from my first career, a defined benefits pension from my second career, and whatever is left of Social Security when I reach eligibility age. I am covered under military medical for life - which really means until I am eligible for medicare. It ain't free, but it is better than most private insurance offers. I contribute to our version of a 401k, but really only as much as necessary to maximize my employers contribution.

We want to retire at 65.

To have a fairly comfortable retirement we reckoned that we'd need around £40k p.a. in today's money. This will allow us to take a couple of holidays a year, buy a car from time and to afford to maintain our house. Allowing for inflation that's around £70k p.a.

Annuity rates are around 5% at the moment so that's why we will need around £1.5 million as a fund. Annuity rates may drop of course and then we'll be absolutely screwed.

Currently in the UK if you have the money invested in a pension, you must use the results to buy an annuity (actually go can get some out as a cash lump sum but the first order approximation is that it all goes into annuity). This may change.

Another thing we need to be alert to in the UK is that although medical treatment is covered under the National Health Service, residential care for the elderly (the accommodation component) is not. That can easily run to £50k pa. Mrs Don and I do not have children or any family who could look after us in our dotage so we have to bear that in mind too. Then again, apart from each other we don't have to worry about inheritance either.

 

[sarge]

That's 3 million UK pounds, which is over 4.5 million in US dollars.

It was 1.5M pounds. I'd already done the conversion to dollars - using 2/1 to make the math easier.

 

[sarge]

We want to retire at 65.

To have a fairly comfortable retirement we reckoned that we'd need around £40k p.a. in today's money. This will allow us to take a couple of holidays a year, buy a car from time and to afford to maintain our house. Allowing for inflation that's around £70k p.a.

Annuity rates are around 5% at the moment so that's why we will need around £1.5 million as a fund. Annuity rates may drop of course and then we'll be absolutely screwed.

Currently in the UK if you have the money invested in a pension, you must use the results to buy an annuity (actually go can get some out as a cash lump sum but the first order approximation is that it all goes into annuity). This may change.

Another thing we need to be alert to in the UK is that although medical treatment is covered under the National Health Service, residential care for the elderly (the accommodation component) is not. That can easily run to £50k pa. Mrs Don and I do not have children or any family who could look after us in our dotage so we have to bear that in mind too. Then again, apart from each other we don't have to worry about inheritance either.

Makes sense. I suppose that my pensions skew my thinking. In today's dollars, my military retirement is around $42K, my civil service retirement will be about $15K (again in today's dollars), Social Security should be about $14K, and my Veterans disability will probably be about $9.6K. I have no real hopes for my 401k. It'll do whatever it does. I contribute 5% of my wages, and that only because my employer matches dollar for dollar up to 5%, and because I can defer income taxes on the contributions. So, I should have about 80K a year in income. The fiancee will have about $55K (civil service pension and social security). Our respective 401k's will pay off our mortgage, and our health care is all but free. Our retirement income in today's dollars will be about 70% of our current joint income, and our expenses will be significantly lower.

I plan to live within those means, and I spend most of what I currently earn to pay for three kids in college, play golf, fly, and pay bills. I honestly had no appreciation for how much money I would have had to save to generate a retirement income equal to what my pensions will be.

 

[mikeyx]

Don't let some silly rule stop you! Why should Illinois be the only state with $80 billiuon in unfunded state union pensions? Soon we will have no actual working employees of the state, and 100% of the budget will pay the pensions and health care of retired workers! Wisconsin should be as lucky!

I've pulled this conversation to this side of the Cheddar Curtain. Please keep it here amongst us FIBs, k?

Posted By: kmortis

end tenure now!

 

[stevea]

Funny how the rest of the world manages to have pensions for public employees and yet things don't descend into a horrifying dystopia. Is it at all possible that just maybe there are right ways and wrong ways to do it? Is that setting up the possibility for nuance when we all know modern American politics breaks everything down into stark black/white dualities?

There clearly is a problem and it does involve US politics, but also unions. Unions are nothing more than a monopoly on labor and should be broken up and forced to compete.

Frankly I think if you taught in a school for 50 years you deserve some sort of pension.

Hyperbole ? If you are 55yo you can retire in Illinois with full benefits after 35yrs of employment. If you are older the employment requirement is lower. No one works 50yrs for the state. The benefits are pretty plush, cost of living, medical ...

UK public employees don't get that sort of benefit.

But you are missing a major point - most employees pay 12.4% of their gross into social security (half employee, half employer) and liberals prefer to see SS as a socialist system; from each according to his earnings, to each according to need (by means testing). So SS is social support for the poor, and lower middle-class and not a retirement scheme. Yet we allow teachers to avoid paying this heavy social tax. That is ridiculous. They pay less into their system for more benefit and avoid supporting the normal social costs.

Ten percent is actually MORE than investment advisors tell young people to sock away.

No - that's only for young ppl who are already paying 12.4% to SS and expect to collect it (iow financial morons). Under very rosy growth assumptions (3% iniflation, 8% growth) a young person w/o SS should be saving ~15% of gross, but that's IMO unrealistically low.

 

[The Don]

Makes sense. I suppose that my pensions skew my thinking. In today's dollars, my military retirement is around $42K, my civil service retirement will be about $15K (again in today's dollars), Social Security should be about $14K, and my Veterans disability will probably be about $9.6K. I have no real hopes for my 401k. It'll do whatever it does. I contribute 5% of my wages, and that only because my employer matches dollar for dollar up to 5%, and because I can defer income taxes on the contributions. So, I should have about 80K a year in income. The fiancee will have about $55K (civil service pension and social security). Our respective 401k's will pay off our mortgage, and our health care is all but free. Our retirement income in today's dollars will be about 70% of our current joint income, and our expenses will be significantly lower.

I plan to live within those means, and I spend most of what I currently earn to pay for three kids in college, play golf, fly, and pay bills. I honestly had no appreciation for how much money I would have had to save to generate a retirement income equal to what my pensions will be.

....and that's one of the reasons why, in the UK, the unions are up in arms. A number of significant changes are proposed which will directly impact on those who will draw on public sector pensions:

• Retirement will come later. In some cases a pension which was available at age 55 will now become payable at 65, 67, who knows. In effect people will need to work for longer (or at least wait for their pension for longer)
• Pension entitlement was dependent on final salary, now it's dependent on average salary
• Pensions were updated in line with RPI (which includes housing costs and is typically higher) now it's in line with CPI
• Contributions are increasing significantly

As someone who will be largely dependent on public sector pensions and entitlement, you too could be a victim if the US government decides that providing you with a $80,000 p.a. pension, effectively a $1.5 - $2.0 million pension fund, is no longer affordable.


For those of us who have to provide for our own pensions it's very bleak. We're not getting positive returns on our investments, extortionate fees are eating away at the meagre values of our funds. I can only see large scale poverty among the old in the future. In order for a comfortable retirement you need about 30% of your gross salary paid into you pension fund every year of a 45 year career. I don't know of anyone who has ever done that.

 

[BenBurch]

Republicans; Sign a contract today and break it tomorrow (sucker!). Just imagine how good they are at keeping campaign promises!

 

[Virus]

You can't promise money that isn't there.

 

[The Don]

You can't promise money that isn't there.

One of the most misleading aspects of the whole thing in the UK at least is that all of the public sector pension arrangements are referred to as "funds" where in fact only a tiny proportion are backed by actual funds (IIRC local government pensions are), the majority are funded from current receipts.

This is one of the key points of disagreement on the grounds that the unions want to know whether the scheme is under or over funded. It is of course impossible to say (and kind of irrelevant form anything other than a principled position) whether whether the find would have been adequately funded had all the contributions to date been invested in a fund. Instead, regardless of contributions to date, it has been decided that the scheme is unaffordable. Clearly there is a bone of contention here because scheme members cannot retrieve their contributions they just have to take it on trust that their employer isn't ripping them off.

 

[WildCat]

Republicans; Sign a contract today and break it tomorrow (sucker!). Just imagine how good they are at keeping campaign promises!

Wake up from your 20 year slumber and look at the books Ben, we're broke. And the money simply isn't there.

I owe nothing to those corrupt politicians and unions who schemed to bankrupt the state for their own selfish benefits at the expense of everyone else.

 

[sarge]

....and that's one of the reasons why, in the UK, the unions are up in arms. A number of significant changes are proposed which will directly impact on those who will draw on public sector pensions

Public sector unions are generally grossly greedy, choosing to persue the most they can get at the greatest expense to the taxpayer for the least returned service possible. Public sector unions should be forbidden - pay and benefits for public employees should be set by legislation.

Public sector employees should be compensated in accordance with how difficult they are to replace, and with an eye for providing the customer with the most service at the lowest cost.

Public sector retirement benefits should not be allowed to creep up over time to the point where the average public sector employee has it so much better than the average taxpayer.

• Retirement will come later. In some cases a pension which was available at age 55 will now become payable at 65, 67, who knows. In effect people will need to work for longer (or at least wait for their pension for longer)

• 
  
  Probably inevitable, and not necessarily regretable. People live longer, and are healthier and capable of being productive longer. I don't see much justification for allowing a person to become part of the idle leisure class for the last 25-30 years of their life at taxpayer expense.
  
  Of course, I also see no justice in structuring it so that a person has to struggle on at a subsistance job well into their final decade either.
  
  

  [*]Pension entitlement was dependent on final salary, now it's dependent on average salary

  
  I have no experience with non-federal pension systems in the US. For federal pensions, we have had a form of income averaging for some time now. I enlisted in the Army in June, 1979. Under the rules in place at the time, I was to receive 50% of my final base pay (almost always your highest pay) after 20 years service. My brother closest to me in age enlisted 15 months later - had he remained in service he would have received 50% of the average of his highest 36 monthly base pays. Our youngest brother enlisted in 1990 and retired after 20 years - he received 40% of his top-36 earning months. Adjusted for years of service, etc, my actual retirement check is much higher than the youngests.
  
  My civil service retirement will be based on a percentage of my high 3 years as well.
  
  
  

  As someone who will be largely dependent on public sector pensions and entitlement, you too could be a victim if the US government decides that providing you with a $80,000 p.a. pension, effectively a $1.5 - $2.0 million pension fund, is no longer affordable.

  
  You pays your money and you takes your chances. I gambled early in life that a military career would provide me with a stable retirement, life-time medical coverage, and an opportunity for low-cost education. So far, my gamble has paid off (although the goverment has already reneged on the medical promise). It does make me nervous that 100% of my salary, now and forever, comes from a single source. There are no regulatory guarantees that I will continue to get anything. While it is unlikely, it is possible that a Congress could simply shut down military and civil service retirement payments and eliminate the Social Security system.
  
  It is true that the US Goverment is inefficient with its pension system, and pays me far more than I am worth. They do the same with a range of Veterans benefits - especially the various education benefits.
  
  
  

  For those of us who have to provide for our own pensions it's very bleak. We're not getting positive returns on our investments, extortionate fees are eating away at the meagre values of our funds. I can only see large scale poverty among the old in the future. In order for a comfortable retirement you need about 30% of your gross salary paid into you pension fund every year of a 45 year career. I don't know of anyone who has ever done that.

  
  With even a very modest rate of return over a 45 year working career, a comfortable retirement is achieveable with significantly less than 30% contributions. At least, it is in the States. Obviously, I know next to nothing about your systems and rules.
  
  That being said, this conversation has been a bit of an eye opener. Thanks for the exchange.

 

[sarge]

Republicans; Sign a contract today and break it tomorrow (sucker!). Just imagine how good they are at keeping campaign promises!

There is no justification for making good on a coerced promise, especially if the means to reasonably do so simply does not exist. You are arguing for drastically increasing general taxation and curtailing vital services in order to fund a bloated, overly generous retirement system for public employees. That is just wrong. There is nothing even remotely sacred about a promise that was never achievable - and it would be grossly wrong for any party to attempt to honor this one.

 

[stevea]

It was 1.5M pounds. I'd already done the conversion to dollars - using 2/1 to make the math easier.

This morning's conversion rate gives 1.5M pound = $2.345M USD.

I think timhau is making good sense.

Here in the US TODAY, inflation is running ~3.5% or a little higher and you can get only get 2.82% on a 30yr bond, and perhaps barely match inflation barely in well managed LT bond fund. So after taxes you even keep up w/ inflation today in fixed investments. Currently I would NOT invest in bonds, and particularly not in LT bonds as they are far riskier but that's another story.

If you bought an S&P index you can get ~2.1% return (taxable) and the S&P has a ~10% total return over the past 10 years (<1% per year!). The broader Russel 1000 is very similar. The Dow Industrials yield ~2.5% and have appreciated at ~2.6% over the past 10 years. So if you were brilliant enough to put money in a Dow Index you'd pay dividend rates on 2.6% and cap gains on the 2.5% and even if you are lucky and they stop the "eat the rich" rhetoric you'll still probably reduce that 5.1% pre-tax yield to a 4.1% after tax yield barely beating inflation by ~0.6%.

So if you invested all of your $2.345M wisely/luckily you could maintain it's value and throw off ~$14k USD per year for the past decade at considerable risk & volatility.

Put another way, in the current and foreseeable climate you might keep up with inflation - so if timhau expects live on retirement for 30yrs he can withdraw 1/30th if the nest egg value per year (no gain in value) with inflation increases. So that's ~$78k/yr in first retirement year terms - increasing with inflation or a little more or less based on market returns and taxes - assuming he can save the $2.34M.

An annuity on the $2.345M and some inflation adjusters will get timhau ~50% more per year for life, because they are putting you in a pool and know on average the members won't live 30 years in retirement, more like 20. But be aware of the risks.

... So, I should have about 80K a year in income. The fiancee will have about $55K (civil service pension and social security). Our respective 401k's will pay off our mortgage, and our health care is all but free. Our retirement income in today's dollars will be about 70% of our current joint income, and our expenses will be significantly lower.

Not sure why you think your expenses will be so much lower. Advisers used to say that - but it's not necessarily true. Work togs and commutes aren't that expensive. Run the actual numbers - don't trust rules of thumb.

I'm ~7 years from retirement and my wife more like 14yrs. I am promised $19k/yr from one former employer (not 100% safe) and max social security for the pair of us ~$41k eventually, and the rest is personal saving. I'm not counting on the retirement or SS being there. We may get some SS but they will means-test and tax the H*** out of it I believe. So I'm with timhau - saving several Mill for retirement.

You know the p*sser is that I know a LOT of people who earn as much as we do but they aren't frugal, and so when they retire with modest savings they will get/keep more social security and more medicare benefits just because they were profligate. A tax on doing the right thing.

 

[BenBurch]

Nothing coerced about the promise; Nobody had to sign those contracts.

People who make promises they regret ALWAYS have an excuse. It was coerced. I can't afford it. I don't feel like paying it. Teachers aren't worth it. It was just an affair.

But people who make promises they will not keep are not honorable people. They are not trustworthy people.

They are not people who deserve a chance to make and break more promises.

 

[WildCat]

Nothing coerced about the promise; Nobody had to sign those contracts.

People who make promises they regret ALWAYS have an excuse. It was coerced. I can't afford it. I don't feel like paying it. Teachers aren't worth it. It was just an affair.

But people who make promises they will not keep are not honorable people. They are not trustworthy people.

They are not people who deserve a chance to make and break more promises.

It's easy to make promises with other people's money. The problem is getting the other people to pay up when they have the choice to blow it off.

The signed off on the pension funding plan that anyone could see was unsustainable, they can live with the results of their choices.

 

[BenBurch]

You elected every one of those people because you are a citizen.

It is on YOU to keep the promise.

ETA: Just noticed about your cat. My sincere condolences.

 

[WildCat]

You elected every one of those people because you are a citizen.

It is on YOU to keep the promise.

I made no such promise. The unions signed off on their pension funding, not my problem that their projections were too optimistic. Let them bail out their own pensions, withold more from their paychecks. Stop letting outsiders raid the pension funds. Stop giving sweetheart deals to cronies, hanger-ons, and lackeys.

ETA: Just noticed about your cat. My sincere condolences.

Thanks.

 

[KoihimeNakamura]

I made no such promise. The unions signed off on their pension funding, not my problem that their projections were too optimistic. Let them bail out their own pensions, withold more from their paychecks. Stop letting outsiders raid the pension funds. Stop giving sweetheart deals to cronies, hanger-ons, and lackeys.

You, through your representative, made the promise. I do think the other points (pension funds/sweetheart deals) is a problem, but the pension thing is something that was promised.

 

[BenBurch]

You, through your representative, made the promise. I do think the other points (pension funds/sweetheart deals) is a problem, but the pension thing is something that was promised.

Exactly. Not keeping promises is wrong. EVEN when keeping the promise is difficult. If you don't like it, don't make such promises again, but not liking it does not relieve you from your duty.

 

[Kestrel]

You, through your representative, made the promise. I do think the other points (pension funds/sweetheart deals) is a problem, but the pension thing is something that was promised.

Right wingers have a dual standard for contractual obligations. Golden parachutes for CEOs and huge bonus payment obligations for investment bankers are unbreakable vows. Contracts made with mere working class people can be discarded at will.