The state should ensure that pension systems are portable, flexible and fair to all teachers.
Illinois only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is not fully portable, does not vest until year 10, and does not provide full employee contributions or any employer contribution for teachers who choose to withdraw their account balances when leaving the system. It also limits flexibility by restricting the ability to purchase years of service.
Vesting in a defined benefit plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Non-vested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Illinois teachers who entered the pension system after December 31, 2010 enroll in Tier 2 and vest at 10 years of service, which is very late and limits the options of teachers who leave the system prior to this point. Teachers who entered prior to this point vest at five years of service.
Many teachers will leave the system before they reach 10 years of service. According to a recent report, about 38 percent of employees in Illinois's teacher-covered pension plan vest, meaning that 62 percent do not become eligible for a pension and, therefore, can only collect their refundable contributions. Teachers who choose to withdraw their contributions upon leaving may withdraw their mandatory contributions without interest, minus one percent of their earnings for survivor benefits (see pension sustainability goal). This means that those who withdraw their funds accrue fewer benefits than what they might have earned contributing to basic savings accounts. Therefore, teachers leaving the pension system would have saved significantly below the level conventionally recommended by retirement advisers for individuals not also contributing to Social Security. While Illinois's mandatory contribution rate allows for flexibility in teachers' retirement savings, it also means that the state needs to educate teachers on what happens if they leave the system and encourage savings in other portable supplemental plans. Further, teachers who remain in the field of education but enter another pension plan (such as in another state) will find it difficult to purchase the time equivalent to their prior employment in the new system because they are not entitled to any employer contribution.
Illinois limits teachers' flexibility to purchase years of service. The ability to purchase time is important because defined benefit plans' retirement eligibility and benefit payments are often tied to the number of years a teacher has worked. Illinois's plan allows teachers to purchase time for previous teaching experience, up to 10 years. Teachers must have earned five years of service credit in Illinois after their out-of-state teaching before purchasing prior service, and the total amount purchased may not exceed two-fifths of their total service in Illinois. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Illinois with more teaching experience. In addition, the mandatory five years of service before purchasing previous service makes the purchase cost more expensive. The state's plan also allows for the purchase of leaves of absence, as long as they return to service for at least a year or the length of the absence, whichever is less.
Illinois Teachers' Retirement System, Actuarial Valuation Report as of June 30, 2015. Aldeman, C. and Rotherham, A. (2014). Friends without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security, Bellwether Education Partners.
Offer teachers a pension plan that is fully portable, flexible and fair.
Illinois should offer teachers for their mandatory pension plan the option of either a defined contribution plan or a fully portable defined benefit plan, such as a cash balance plan. A well-structured defined benefit plan could be a suitable option among multiple plans. However, as the sole option, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in Illinois do not participate in Social Security, they have no fully portable retirement benefits that would move with them in the event they leave the system.
Increase the portability of its defined benefit plan.
If Illinois maintains its defined benefit plan, it should allow teachers that leave the system to withdraw their full employee contribution plus matching employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.
Offer a fully portable supplemental retirement savings plan.
If Illinois maintains its defined benefit plan, the state should at least offer teachers the option of a fully portable supplemental defined contribution savings plan, with employers matching a percentage of teachers' contributions.
Illinois was helpful in providing information necessary for this analysis.