Blog

Jane the Actuary Retirement

Forbes post, “The Key ‘Social Security Cap’ Question: Where Are Our Priorities?”

Originally published at Forbes.com on February 19, 2020.

 

Here’s a recap of the leading Democratic candidates’ Social Security proposals:

“Bernie [Sanders]’s Social Security plan would lift this cap and apply the payroll tax on all income over $250,000.” 

Elizabeth Warren’s “plan imposes a 14.8% Social Security contribution requirement on individual wages above $250,000 –– affecting less than the top 2% of earners –– split equally between employees and employers at 7.4% each” and “establishes a new 14.8% Social Security contribution requirement on net investment income that applies only to the top 2% ––individuals making more than $250,000 in annual income or families making more than $400,000 in annual income.” 

“The Biden Plan will put the program on a path to long-term solvency by asking Americans with especially high wages to pay the same taxes on those earnings that middle-class families pay.” (No further details given.)

“Pete [Buttigieg]’s plan will [require that] . . . individual wage earnings above $250,000 (which means family wage earnings above $500,000 for equal-earning couples) will face additional Social Security taxes and earn modest Social Security benefits for their extra contributions. . . . Pete will work with Congress to develop options for enshrining a process of automatically adjusting high earners’ contributions to keep Social Security solvent without ever cutting benefits or ever sabotaging the program via privatization.”

“Senator Klobuchar supports subjecting income above $250,000 to the payroll tax and extending the solvency of Social Security.”

For each of these candidates, the additional tax would be directed both to make up projected Social Security shortfalls as well as to boost benefits, both for the poor and across-the-board.

What’s more, the Social Security 2100 Act, H.R. 860, sponsored by Rep. John Larson of Connecticut with 208 Democratic co-sponsors, but lacking the bipartisan elements that would have allowed it to become law, had a similar provision: a surtax on wage income of over $400,000. That income would earn Social Security benefits at the rate of 2% (compared to 90%/32%/15% in current law) — a rate so small as to be of no significance at all.

What’s also noteworthy about the Social Security 2011 Act is this: the $400,000 income threshold for the “excess wages” would not increase with inflation. In fact, this gap between the existing earnings limit and this “excess wages” level is intended to close, until the income level which is now a cap on both tax and accrual becomes simply a new bendpoint at which the benefit accrual drops to insignificance.

None of these five candidates’ proposals specify whether they, too, see their $250,000 threshold as a gap which closes over time, or whether they intend to preserve this gap between the ceiling and the surtax. It could be either, I suppose, bearing in mind that it’s entirely reasonable for this level of detail to be omitted from a webpage or white paper, and that these candidates’ proposals are not simply carbon copies of the Larson bill, but, at the same time, every variant of an above-cap tax that’s otherwise been proposed in detail includes a benefit accrual rate that’s so low as to be a farce and simply deceitful to claim it’s a meaningful rate.

But consider the current marginal tax rates:

A single worker earning $250,000 pays a 35% tax on income above $207,351. A married couple pays 35% tax starting at an income of $414,701. These rates increase to 37% for income above $518,401 or $622,051.

At the same time, the current FICA tax of 6.2% employee/6.2% employer is, in reality, a 12.4% tax on the workers with half of this hidden from view. The Warren proposal increases the rate paid to nearly 15%. Buttigieg’s proposal? Who knows?

And, again, the Social Security tax up to the current ceiling has some reasonable connection to benefits earned, though above the top bendpoint, this connection is already shaky. This connection between contribution rates and benefits accrued is a standard piece of the way social insurance works in most developed countries, and, in fact, the ceiling in the United States is unusual for being higher than others, not lower. A 12.4% — or 14.8% or some changeable unknown rate — rate for high earners with a farcically-small level of benefit accrual, is a tax, and nothing other than that.

So we’re left with two fundamental questions:

Should the tax rate for upper middle class earners be set at 50% of wages (plus state income tax on top)?

And if that’s the case, are we really sure that we want to spend that money wholly on boosting Social Security benefits — especially in the across-the-board manner that the various candidates are proposing — or forestalling their cuts despite increased longevity and unfavorable demographics, rather than, at least in part, meeting such needs as anti-poverty programs, childcare for low-income parents, parental leave, improved services for the disabled, and so on, or even simply reducing the deficit?

The bottom line is this: Social Security funding and spending simply must be considered alongside all other spending objectives, rather than seeing the elimination of the earnings ceiling as a source of Social Security-specific free money.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “What Went Right With The Chicago Laborers’ Fund? Another Multiemployer Pension Case Study”

Originally published at Forbes.com on February 17, 2020.

 

“State and local pensions are dangerously underfunded!”

“Multiemployer plans are nearly insolvent!”

“The birth rate is dropping and there will be no one to support us in our dotage!”

Am I starting to sound like a broken record?

Time for some good news, for a change, or, rather, a bit of a case study with a multiemployer plan that is not headed toward insolvency, and is in fact in the “green zone” that designates healthy plans. The plan in question is the Chicago Laborers’ Pension Plan, which provides retirement benefits for workers in the building and construction trades in the greater Chicago area: road builders, masons, plasterers, and others represented by unions which fall under the general heading of “laborers.” The plan has nearly 29,000 participants, of which 12,000 are active employees, and fits within the classic purpose of a Taft-Hartley multiemployer plan, providing one single unified pension benefit for workers who might have had a variety of employers in their working lifetime. (All the information that follows comes from the plan’s website as well as the Form 5500 Schedule B reporting for the plan, available from 2000 – 2017, except for the years 2008 and 2010.)

Let’s start with some basics.

Here’s the plan’s funded status, as reported on the website beginning with the 2010 plan year up to the present.

Is that a bit unfair? The small intervals make it look like there’s a lot of fluctuation. How about this one?

And yet that’s not quite right. You’ll note I’ve labelled this “reported funded status” — it’s a quirk of the funding rules that is not simply the assets divided by liabilities at valuation date, but that contributions scheduled to be made in the coming year but designated for the prior year are “counted” as part of the assets. So here’s a chart of the plan’s funded status calculated in a more straightforward manner, based on the government reporting, which stretches back further but misses the most recent years. The funding level had a clear decline from a previously higher level and is now below 80% instead of just above, but has been steady since the post-recession market recovery.

For what it’s worth, I’ve also included a comparison to the Teamsters here, since I looked at their situation at length in the past.

And here’s one more funding level chart:

The “Current Liability” measure is based on a corporate bond rate, rather than a valuation interest rate that matches the expected return on plan assets. In the case of the Laborers’, the plan has used 7.5% for the latter rate for the entirety of this time frame. The corporate bond rate, however, has dropped considerably, even though, due to “funding relief” provisions, it is higher than the actual bond rate would dictate. Here’s a chart showing both the funded status and the applicable discount rate over time:

So what does all this mean?

There are a couple fundamental questions which apply to all multiemployer plans, not just the ones facing insolvency:

What funded status target is necessary in order to avoid insolvency in the future?

and

What is the appropriate discount rate to measure liabilities, to protect against insolvency?

These are not easy questions, and this is, in part, what’s stymieing the efforts to put together a workable consensus on multiemployer pension rescue and reform.

In particular, the funded status charts above clearly illustrate the impact of a tighter discount rate regulation – the funded status drops from 75% to 40%, and contribution requirements would escalate sharply.

Here’s another issue:

The Teamsters and the mine workers found themselves in such dire straits because the ratio of active workers to total participants shrunk so drastically so that there simply weren’t enough participants (or participating employers) to make up the funding deficit.

Here’s how that looks for the Laborers’:

The ratio for the Teamsters dropped dramatically during this timeframe, and especially during 2007, when UPS left the plan. The Laborers’ plan looked fairly stable — until it wasn’t any longer, with a substantial drop-off from ratios in the low 60s, to not much more than 40%. (The blanks are due to years with missing data in the online reporting.)

What happened?

The recession happened — at least, it appears reasonable to surmise this is the cause.

And as a result, the relative levels of contributions, benefit accruals, and benefit payouts shifted after the recession:

To keep the plan funding levels in line, even with fewer active employees, employer contribution levels increased significantly. The above chart shows total contributions; below is the hourly contribution rate (that is, a per capita equivalent, because employer pay into the fund on behalf of and in direct proportion to their active workers).

But here’s another characteristic of multiemployer plans to fit into this context: in a typical single-employer plan, the benefit formula is based on a worker’s pay at retirement; in a multi-employer plan (and in union plans generally), it’s more often based on a fixed multiplier per year of work history, which is increased on a regular basis in the same way as pay scales are increased.

Here’s the contribution schedule, according to the plan document at the plan’s website:

Not only is the multiplier negotiated in each successive collective bargaining agreement, but the additional liability added to the plan with each increase — because each increase is retroactive — is “paid for” by future contributions; there is no provision to determine liability based on anticipated future increases at a given rate (as is done with accounting requirements, for explicitly salary-based plans, when salary is projected to retirement based on anticipated increases), nor a requirement to only increase the multiplier when the plan is so well-funded that the increase can be “paid for” out of its overfunding.

The 1980s saw significant increases in the multiplier — a total increase of 150% over this time frame. Online government reporting doesn’t date this far back to enable us to understand whether this, and the more moderate but still above-inflation increases in subsequent years, were at a time of high funding levels, or whether there is other relevant context. But from 2008 to 2019, despite the significant increase in employer contributions, participants saw no increase in benefit levels. And even now, one could make a case that the 2019 increases were not appropriate, that the plan should have waited until funding levels were more solid, at the full funding level rather than just barely exceeding the 80% threshold that defines a “green zone” plan — but it’s easy to see active plan participants complaining that contribution levels had grown so much without seeing any benefit, and complaining that they’d waited long enough to resume the regular benefit increases.

When it comes down to it, there aren’t any easy answers. Can the Laborers’ fund be confident that, now that the recession is over, they are at a “new normal” or will even, surely soon enough when the Chicago housing market finally picks up, can more active participants to balance out the retirees? Or does holding such a belief put them at risk of facing troubles in the future, difficulties they would be hard-pressed to rectify once they occur? Should they put their efforts into reaching 100% funding, for more security, or trust that their 80%/”green zone” status offers them the security they need? How much greater risk are they at due to their 7.5% investment return assumption, and the prospect of losses each year the plan earns less than this level? For that matter, even though the contributions are paid by employers, it’s generally recognized that the workers are sacrificing salary they would have otherwise been paid, and in the time since the recession, to keep the funded status level, the foregone-pay contributions have risen by over $5.00. There’s nothing fundamentally wrong with that, if they have a strong ethos of intergenerational sharing as a part of “union brotherhood,” but is that the case, or have they resented their (employers’) contributions climbing this past decade solely to avoid shortfalls due to generous increases in the past and that shift in active-to-retiree ratio?

And as a reminder, this plan was chosen somewhat at random, but is fairly typical of multiemployer plans in many ways, especially in that (using 2018 data) two-thirds of plans were more than 80% funded on a “funding” basis, accounting for 63% of participants in the overall system. Forty-four percent were actually over 90% funded (35% of participants), and 22% (8% of participants), over 100% funded. There are two challenges facing the multiemployer system, because, beyond rescuing those plans about to collapse into insolvency, Congress must ensure that new legislation keeps these plans healthy in the long term.

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “WEP Follow-Up: The Social Security Government Pension Offset Is Also Entirely Reasonable”

Originally published at Forbes.com on February 14, 2020.

 

Yesterday I wrote that various candidates’ promises to eliminate the Windfall Elimination Provision were, most charitably, misguided, but, more likely, simply pandering, because the WEP is an entirely appropriate provision to prevent certain teachers from “double-dipping” in their retirement benefits. And in response, some commenters (on twitter and my personal website) suggested that while the WEP reductions seemed fair, the GPO, or Government Pension Offset, was unreasonable.

In response, here’s a follow-up: yes, the GPO is also reasonable and prevents double-dipping. But to explain that, I have to address what seems like a wholly different topic first, so be patient!

Among the various promises that the Democratic presidential candidates such as Pete Buttigieg and Amy Klobuchar are making is this: they will institute a system of “caregiver credits.” Buttigieg’s white paper describes his proposal as follows:

“ Those caring full-time for children or for a disabled or elderly family member do not currently receive credit toward Social Security benefits—disproportionately affecting women. Under Pete’s plan, Social Security will finally recognize the undeniable: caregiving is work. Caregivers of a child, elderly, or disabled dependent will be awarded credit toward Social Security benefits as if they earned the median earnings of a full-time, year-round worker outside the home, with no limits on the number of years for which caregivers can claim the credit.”

Are caregiver credits a good idea? Maybe, if implemented judiciously, and I’m not sure the Buttigieg proposal hits the mark, without duration limits and with a structure that boosts benefits for women out of the workforce up to the median level, that is, above, by definition, half of the workforce. There are a variety of ways to provide benefit boosts to mothers: income-splitting credits credit to stay-at-home mothers half their husbands’ income; Canada reduces the number of years included in the averaging period; Switzerland and France increase benefits for parents regardless of their work choices; and, yes, Germany and Austria provide caregiver credits, with, in Germany for example, median-income credit given to caregivers of under-3s, a boost to part-time workers juggling work with caregiving, and partial credits for parents of under-10s.

And, as it turns out, the United States already has a form of caregiver credits; it’s just that it’s a simplistic and old-fashioned system that’s not perceived that way. In part, Social Security uses only 35 years of averaging to reflect some absences from the workforce over one’s adult years. But in addition, a woman who has been out of the workforce for a significant length of time is provided a special form of minimum benefit, in the form of 50% of the benefit earned by her husband. (Yes, the Social Security website uses confusing wording, with a subject header “Benefits For Your Spouse” to describe benefits individuals may be eligible for as a spouse, but so be it.) Of course, this doesn’t benefit out-of-the-workforce parents who aren’t married, or other sorts of caregivers, but at the time when Social Security was designed, this sort of minimum benefit made sense.

Again, with respect to benefits for surviving spouses of deceased Social Security participants, the wording of the website suggests that workers earn these benefits for their spouses, and even calls them a form of “life insurance.” But, again, once the surviving spouse reaches retirement age, the deceased spouse’s benefit serves as a minimum benefit to what she or he has earned in her own right.

The bottom line is that in an employer-benefits based system, workers earn benefits for themselves and their families. They earn health insurances for family coverage. They earn life insurance benefits that pay out to designated beneficiaries in case of their death. And if their employer provides pension benefits, those benefits provide the opportunity to select a “joint and survivor” form in which their spouse receives a specified portion of the benefit after their death — and the latter is true regardless of what income that spouse might have, because it’s a benefit earned by the deceased spouse.

But Social Security isn’t an employer benefit. It’s Social Insurance. And the rules are different. Regardless of how they may be described, the reality is that these are benefits accruing to the recipients themselves, even if they are “earned” by means of being married to an earner. A non-working mother truly receives her own Social Security benefit even if based on her husband’s income record; it is not the case that he receives an extra benefit because he has a dependent wife, and it is not the case that he has a government-provided life insurance policy to the benefit of his wife.

And that gets us, finally, to the Government Pension Offset.

This offset applies to workers in federal, state, or local government who have opted out of participating in our nationwide social insurance system, or whose employer has chosen to do so.

The fundamental calculation is this: the amount of benefit an individual would have been due as a spouse or surviving spouse minimum benefit, is reduced by two-thirds of the value of “opt-out” government pension. If an individual would have been eligible for a $500 minimum benefit as the spouse of a Social Security-covered worker, but had worked for a state pension system that opts out of Social Security and earned a $600 pension, then two-thirds, or $400, would be subtracted from the minimum-benefit as-a-spouse, for a net of $100. (The example comes directly from Social Security.)

The principle is entirely fair: the minimum-benefit-as-a-spouse should only ever be a minimum, not an add-on. To get both the minimum benefit and the full own-benefit is double dipping every bit as much as if this were the case by stacking two Social Security benefits together.

Now, at the same time, in a perfect world, the math would be different.

After all, a state or local pension benefit is a Social Security-replacement benefit and an employer supplemental benefit all wrapped into one. A more precisely-fair calculation would split the state or local pension into two numbers: the portion that replaces Social Security, and the portion that supplements it in the same way as private-sector pensions do. Then only the first of these would be compared to the benefit-as-a-spouse to identify whether Social Security should pay out a minimum benefit.

Now, whether Social Security has the data available to do the math, I can’t say. And even if so, one could make the case that an individual who has participated in an alternative pension system for their career has made a choice to opt out of Social Security in a way that’s not true of a non-earner or low-earner. And for middle/upper income full-career workers and for their employers, opting out is a win, financially, because they opt out of subsidizing the poor with a bend-point formula in favor of earning benefits at a flat rate.

And, again, the solution to this unhappiness is simple (and I cannot stress this enough): those 15 states whose employees do not participate in Social Security should be moved into the system like the rest of us. Why those states — which include notoriously-poorly funded California and Illinois — don’t do so is plain: it would increase their costs and force them to pay up-front in the form of FICA contributions.

(And, incidentally, the federal government itself made the switch back in 1984, at which point newly-hired workers as well as those who chose to make the switch, began to be covered by Social Security.)

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Biden And Warren Want To Eliminate The Windfall Elimination Provision. Here’s Why They’re Wrong.”

Originally published at Forbes.com on February 13, 2020.

 

Here’s what Elizabeth Warren promises, if elected president, with respect to public sector workers whose employers have opted out of Social Security:

“if you work in state or local government and earn a pension, two provisions called the Windfall Elimination Provision and Government Pension Offset can reduce your Social Security benefits. WEP slashes Social Security benefits for nearly 1.9 million former public-sector workers and their families, while GPO reduces –– and in most cases, eliminates –– spousal and survivor Social Security benefits for 700,000 people, 83% of whom are women.

“My plan repeals these two provisions, immediately increasing benefits for more than two million former public-sector workers and their families, and ensuring that every current state and local government employee will get the full Social Security benefits they’ve earned.” 

Here’s Joe Biden:

“Current rules penalize teachers and other public sector workers who either switch jobs or who have earned retirement benefits from various sources. The Biden Plan would eliminate these penalties by ensuring that teachers not eligible for Social Security will begin receiving benefits sooner – rather than the current ten-year period for many teachers. The Biden Plan will also get rid of the benefit cuts for workers and surviving beneficiaries who happen to be covered by both Social Security and another pension. These workers deserve the benefits they earned.”

To start with an incidental observation, the Biden promise to get rid of the 10 year delay is poorly worded but appears to be a promise to restrict public plans’ ability to use long vesting schedules as a way of reducing benefits for short-service workers in favor of full-career employees, and has nothing in particular to do with federal Social Security rules.

But both of these candidates promise to get rid of the Windfall Elimination Provision (WEP) and the Government Pension Offset — in Warren’s case, characterizing these as unfairly “slashing” benefits.

Yet these provisions are entirely fair, and intended to ensure that these workers don’t double-dip and take advantage of provisions that were intended to help the poor, rather than middle-class workers.

Consider the structure of the Social Security benefit formula: regardless of how many years one has worked, Social Security averages only the highest 35 years (after wage indexation). Then the benefit formula sums up the total of

 

  • 90% of the first $960 in average indexed monthly earnings (AIME), plus
  • 32% of the AIME between $960 and $5,785, and
  • 15% of the AIME over $5,785.

 

(See the Social Security site for more details.)

These two design element are meant to help the poor. The limit of 35 years in the averaging period, even though one might work considerably longer — as many as 47 years, that is, from age 18 to 65 — is not meant as a signal that 35 years of work are sufficient to have “earned” the full benefit rate; Social Security is meant to be accrued over one’s entire working lifetime. Rather, the shorter averaging period benefits those who have spells of unemployment, time spent caregiving or in school, etc. And the 90% benefit level for the lowest income tranche boosts benefits to a relatively higher percent of pay, for those otherwise at risk of below poverty benefits — whether their AIME is low because of many zeros in their work history or a lifetime of low-income work.

Without an adjustment to their benefit, teachers unfairly benefit from these provisions. Teachers who spend part of their working lifetime teaching in a state which opts out of Social Security, and the remainder elsewhere, or working in the private sector during the summer, or moonlighting after-hours, or by working for part of their career in private-sector, Social Security-contributing jobs such as parochial school-teaching, appear “on paper” to have low wages and benefit from the imbalanced 90% tranche meant to aid the genuinely poor. In addition, they are “double-dipping” when they collect benefits from a system that’s designed for people paying into the Social Security system during one’s entire working lifetime, while simultaneously collecting additional benefits earned without paying into the system.

The WEP attempts to remedy this and remove the teachers’ unfair extra benefits. The method is rudimentary and simply says that if you have a pension benefit due to you due to participation in a public pension plan that opts out of Social Security, then you don’t get the benefit of that 90% factor on the first $960 in monthly earnings, because the Social Security benefit is treated as supplementary to the primary public plan benefit. The WEP is not applied if you have 30 or more years of “substantial earnings” (about $25,000 in 2020), which would mean that the income from which you paid Social Security contributions is your “primary” income and your public employment was secondary, and between 20 and 30 years there’s a gradual phase-out. The reduction of the WEP is also capped at half the level of the pension due to Social Security opt-out income (which, among other things, means that schoolteachers who were never vested, never have a WEP applied to them).

(See the Social Security Administration publication “Windfall Elimination Provision” for more information.)

Now, one can argue easily enough that this is not the right way to solve the problem, that this crude calculation doesn’t really work as it should. And indeed, the original formula was based purely on the ultimate Social Security opt-out pension benefit due to limitations in data availability at the time the law was implemented, and a proposed reform which would adjust benefits in proportion to private vs. public sector income, the “Equal Treatment of Public Servants Act of 2019” has been introduced repeatedly, most recently this past summer by Rep. Kevin Brady (R-Texas), with 44 cosponsors, all but 3 of them Republican.

Specifically, since data is now available on noncovered as well as covered wages, the Social Security Administration would calculate a new preliminary PIA (or baseline Social Security benefit) based on a workers’ total lifetime compensation. Then the ratio of the covered earnings to total earnings would be calculated, and this ratio would be applied to the preliminary Social Security PIA. This calculation would be called the PSF, or Public Servant Fairness formula. (See “Reforming the Social Security WEP Exposes Weaknesses in State and Local Pensions,” by Chantel Boyens, Erald Kolasi, and Jack Smalligen athe Urban Institute, for a comprehensive explanation.)

But here’s an interesting wrinkle to that proposal: it would help lower-income earners, by giving them more of the benefit of that initial 90% than they have at present. But there are other workers who would be disadvantaged by this change, because it reduces their Social Security benefits in proportion to their non-covered income without regard for whether that non-covered income actually produced the same level of benefits as Social Security.

And, yes, I yammer on incessantly about the Illinois Tier 2 teachers’ benefits, and the raw deal those teachers are getting. Teachers who leave without accruing 10 years of service will receive no benefit at all. (Yes, Social Security also requires 10 years of work history, but this can be from among multiple jobs.) Teachers who work moderately longer will receive a benefit that’s still lower than Social Security, not so much due to the benefit formula, as because the benefits are frozen at the time of termination, in contrast to Social Security’s indexation (adjusting for wage inflation) of each year’s earnings up to the time of the calculation at retirement.

In fact, as the Teacher Pensions Blog points out, Elizabeth Warren’s home state of Massachusetts is similarly egregious, with a 10 year vesting requirement and a benefit accural structure that means that a new 25-year-old teacher would have to teach for 22 consecutive years before their public pension plan benefits are as generous as Social Security — all to keep the cost of the system in check while keeping benefits (overly-)generous for full-career teachers.

Hence, the title of the Urban Institute report: this appealingly simple WEP reform exposes the weaknesses that these state and local pensions are a raw deal for short- and even medium-service workers.

But that doesn’t mean that the answer is to eliminate the WEP, as Warren and Biden promise. It’s to fix the inequities in the state and local systems or, better yet, to include all workers in Social Security, rather than permitting opt-outs in the first place. (And, incidentally, the GPO works similarly to prevent double-dipping, but the finer points of that program are a story for another day.) As it is, the call to eliminate the Windfall Elimination Provision sounds like a nice way to help teachers, but it’s nothing other than pandering.

And yes, as a final reminder, my “basic retirement income” Social Security plan eliminates these issues entirely.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Do Illinoisans Think Teacher’s Pension Benefits Grow On Trees? A New Poll Seems To Say ‘Yes.’”

Originally published at Forbes.com on February 12, 2020.

 

Yesterday, the Illinois Education Association released new polling on what it calls the “State of Education” — that is, public opinion on schools and teachers in Illinois, based on a November poll of randomly-selected adults in Illinois.

The results were not a surprise.

Asked to say the first word that comes to mind about Illinois public school teachers, nearly two-thirds (63%) said something categorized as a positive response. Having high quality public schools was identified as a high priority (8 to 10 on a scale of 10) by 81% of those polled, second only to cleaning up corruption (85%); drilled down, 59% said it was a “10,” a top priority, compared to 69% identifying cleaning up corruption in that way (each choice was prioritized separately), and 58%, lowering crime.

What’s more, respondents had a more favorable view of their local schools than nationwide schools: only 23% gave schools state- or nationwide an A or B ranking compared to a full 53%, ranking their local schools that way.

When it comes to money, 66% said that “funding for public schools” should increase, 52% said that teachers are paid too little, and 66% strongly or somewhat supported the new law that sets teacher minimum pay in Illinois at $40,000 per year.

And, finally, lest you wonder why I’m addressing this poll on this platform, the poll does indeed ask about pensions, and these results were concerning. The poll asked:

“Right now, teachers hired after the year 2011 in Illinois must work in a classroom until age 67 in order to be eligible to receive their pensions, no matter how many years they have been teaching. Do you strongly oppose, somewhat oppose, somewhat support or strongly support recently hired teachers being able to receive their pensions at age 60 instead of waiting until 67?”

Yes, my jaw dropped when I saw this.

Illinois teachers are indeed able to retire before age 67. They will see their pensions reduced to reflect the increased number of years of payments, but they are not trapped in the classroom until age 67.

And it’s all the more shocking to design a poll suggesting that a reasonable alternative is retirement at age 60 — especially when teaching is far from the sort of strenuous job for which early retirement or a shift to another occupation is appropriate.

Now, in the question on priorities, though ranked as a priority by fewer people than chose education, 53% of people did believe that it should be a high priority to reform the state pension systems. But despite this, 62% of Illinoisans supported a change to enable retirement at age 60.

Ow. Ow. Ow.

It makes my head hurt.

Drilling down to various demographic groups, surprisingly, it is the younger demographic groups who supported a reduction in the retirement age most strongly. Here’s the breakdown (page 310 of the full report, as viewed online, or 251 in the printed report pagination):

  • Age 18 – 24: 82%
  • Age 25 – 34: 72%
  • Age 35 – 44: 58%
  • Age 45 – 54: 64%
  • Age 55 – 64: 58%
  • Age 65+: 53%

What accounts for this? Are younger folk simply less informed and more taken-in by the poll’s misleading wording, or are they ageist-, believing that older teachers should leave the classroom?

Remarkably, there was no other demographic split which produced this clear a trend. 63% of men and 61% of women supported an early retirement age. Even splitting out responses by whether they had a family member who was a teacher, there is not a stark differentiation — 63% of those with family members and 59% of those without support this age reduction. Of those who them selves worked in education, 66% supported the age reduction, compared to 61% of those who didn’t.

Lastly, the poll also asked:

“As you may know, teachers in Illinois do not pay into and therefore do not collect Social Security when they retire. Do you think that Illinois teachers should receive their full pension, see their pensions cut some or see their pensions eliminated?”

Again, headache. An appropriate question might have suggested that teachers should in fact participate in Social Security (and Illinois teachers are in the minority, as 35 states’ teachers are in the Social Security system).

But here are the responses: 75% believe they should receive their full pension, even though, mathematically, at least some of these folks must have simultaneously said that they believe that the state pension systems should be reformed. Again, there are only modest differences between teachers and non-teachers, between those who have teacher-family members and those who don’t. But there is a strong divide by sex: women are much more likely to support retaining full pensions, at 81% vs. 69% of men. And, the pattern of support by age isn’t quite as strong, but it’s still clear (page 305 of the report, as viewed online, or 246 in the printed report pagination):

  • Age 18 – 24: 85%
  • Age 25 – 34: 82%
  • Age 35 – 44: 80%
  • Age 45 – 54: 70%
  • Age 55 – 64: 67%
  • Age 65+: 72%

What’s more, the younger folks are less likely than the older ones to respond that they “don’t know.” They may be less-informed, but, if so, they don’t know what they don’t know.

Again, 53% of Illinoisans say that pension reform is an important priority for them, an 8 – 10 (page 83). That’s 55% of women and 52% of men, 53% of teachers, and 53% of non-teachers. And 35% say that pension reform is a top priority — a “10.” But of those who place reform at a 10, only 67% support reducing pensions. And, yes, again, split by age, 43% of 18 – 34 year-olds, vs. 55% of 35 – 59 year-olds, and 60% of 60+ year-olds, consider pension reform an important priority.

What’s more, that pattern is not there, or not as strong, for the “lowering taxes” priority (that’s 63%/70%/70%) or the “balancing the state budget” priority (77%/76%/79%).

All of which means that we — that is, those who support pension reform, who are convinced that it is a necessary step for Illinois to be able to balance its budget and provide essential services, who believe that there is no sleight of hand that can make the issue go away without hard choices — need to figure out how to get our message out to everyone that neither money nor pension benefits grow on trees. And if that takes meme-writing or some viral YouTube or Tik-Tok videos, well, then let’s get on it.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary General Interest

What is a “public option”? Wrestling with the question.

https://pixabay.com/photos/mail-truck-mail-clerk-mailman-3248139/

This started out as a Forbes article draft.  It got too long.  I decided that, in the end, what I really ought to do, is write the whole darned thing, then shrink the retirement-related bits down for Forbes.

Once upon a time, in my neck of the woods, at least, if you wanted to enroll your child in swimming lessons, you went to the local public swimming pool.  Sure, you could also sign him up at the Y, but that was a bit out of the way, though you were vaguely aware that some people drove that distance.  The lessons were taught by high schoolers, the pool was cold, and at the lower skill levels, the kids spent one-sixth their time working on the skill with the teacher’s direct supervision and the remaining five-sixths of the time waiting at the edge while the remaining kids had their turn.  It was a cheap price because of the subsidies from tax revenue, but nothing to write home about.

Now, around here, due to the magic of private enterprise, competitors have sprung up: Chicago Swim School, Goldfish Swim School, British Swim School, to name those in closest proximity.  They cost more, but their lesson plans even for the youngest children focus on learning to float right away, rather than using kickboards, learning “bobs” and playing games.  They have much more individual attention and their teachers are adults rather than teens.

At the same time, there have long been multiple fitness centers in the neighborhood, at a wide range of prices, but now the local park district is getting into the game with a remodel of its indoor pool facility to add a second story with a fitness center component.  The pricing is a bit higher than such chains as the local LA Fitness (though with a discount for couples and families — eligibility age for children not provided), not to mention the bargain-basement Fitness 19 or Planet Fitness, but lower than the more upscale locations such as the NCH Wellness Center.  Is there value for the money?  It remains to be seen in terms of the final product, though one of the ways they’ve been pitching it, from the early days when they envisioned just a few treadmills,  is an opportunity for Mom or Dad to exercise while their children are at swim lessons, swim team, or open swim.

Is the rise of competitor private-sector swim lesson schools a sign that the park district is not providing a quality “product”?

Is it appropriate for the park district to introduce a competing “product” in the fitness-center market?

And what the heck does this have to do with retirement?

A new book, The Public Option:  How to Expand Freedom, Increase Opportunity, and Promote Equality, by Ganesh Sitaraman and Anne L. Alstott, says this has everything to do with retirement, because they believe that expanding “public options” is the way to greater well-being for all Americans.

But the book defines “public option” generously, to encompass essentially all government services now in existence or hypothetically implemented in the future.  They write,

Pages: 1 2