The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
Illinois's pension system is based on a benefit formula that is neutral for members hired after December 31, 2010, meaning that each year of work accrues pension wealth in a uniform way until reaching age 67.
Teachers' retirement wealth is determined by their monthly payments and the length of time they expect to receive those payments. Monthly payments are usually calculated as final average salary multiplied by years of service multiplied by a set multiplier (such as 1.5 percent). Higher salary, more years of service or a greater multiplier increases monthly payments and results in greater pension wealth. Earlier retirement eligibility with unreduced benefits also increases pension wealth, because more payments will be received.
To qualify as neutral, a pension formula must utilize a constant benefit multiplier and an eligibility timetable based solely on age, rather than years of service. Basing eligibility for retirement on years of service creates unnecessary and often unfair peaks in pension wealth, while allowing unreduced retirement at a young age creates incentives to retire early. Plans that change their multipliers for various years of service do not value each year of teaching equally. Therefore, plans with a constant multiplier and that base retirement on an age in line with Social Security are likely to create the most uniform accrual of wealth.
Illinois's pension plan is commended for utilizing a constant benefit multiplier of 2.2 percent and for recently enacting legislation to allow standard retirement based solely on age, regardless of years of service. Teachers must be vested at age 67, approximately Social Security's retirement age, to receive unreduced benefits.
Illinois was helpful in providing information necessary for this analysis.