In recent news the state of Illinois introduced their Pension Reform Bill and as of this writing Illinois Governor Pat Quinn has yet to sign the bill which he said he would. After reading through the bill as well as some other readers’ interpretations of the bill it’s my opinion that it could be much, much worse. Let me put it this way; if I’m a current or retired state worker, I’m not upset. I may be a little inconvenienced, but certainly not angry.
Dave Grant, CFP® and founder of Finance for Teachers wrote a very succinct and informational summary of the bill some of which I’ll highlight in this post.
Some of the more notable changes include the removal of the 3% compound COLA increase and is now being replaced and calculated by years of service and current inflation rates.
Other changes include any new employees hired after the passage of the bill will not be able to take any unused sick or vacation days and have them put toward service credit for their pension. Current employees can still take advantage of this provision and use up to 2 years of unused sick or vacation days.
Employees currently contributing 9.4% of their salary will see a decrease of 1% and will now contribute 8.4% of their salary. This is because the state has put in requirements that starting in 2019, $364 million will be paid to the state Pension Stabilization Fund and from 2020 onward a $1 billion annual payment will be made to the fund. According to the bill this would have the pension 100% funded by 2044.
Side note: We recommend state employees take that 1% reduction and save it in their deferred comp plan (457) or into an IRA.
There is an addition of defined contribution plan (401k type plan) that up to 5% of employees can participate in. This is first come, first served but may be an option for employees that don’t trust the state and want the investment responsibility themselves. It remains unclear whom the plan providers will be and available fund options (we hope index funds).
The retirement age has also increased to anyone under age 45. Currently full retirement age for Tier I employees is age 60, however, depending on an employee’s current age their full retirement age will be increased with the increase dependent on their current age as of June 1st, 2014. Tier II employees have a full retirement age of 67.
In addition, the highest salary that will be calculated for pension purposes is capped at $106,800 – lower than the current Social Security cap of $113,700.
Overall, the changes aren’t necessarily bad, but they are necessary. There remains some uncertainty going forward as to whether or not the bill will remain in force or if it will be challenged in court to determine its compliance with Illinois’ Constitution.
We encourage any state employee or retiree that has questions regarding the effects of the new bill on their retirement planning to talk to us. We can be reached at 217-488-6473 or online at www.blankenshipfinancial.com.