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Broken Benefits: Public vs. private explored

Created: Thursday, October 27, 2011 5:30 a.m. CDT

Robert Hammon spent more than 30 years in education; 21 of those years were in Sycamore School District 427, where he retired as superintendent after 13 years of service.

Hammon’s lengthy career has guaranteed him a monthly pension of $11,806 for as long as he is retired – or $141,672 annually. To earn that type of retirement package in the private sector, investment managers said one would have to save anywhere between $2.2 million to $2.8 million.

Six-figure pensions for public employees have sparked debate about public- versus private-sector compensation for years, and it has grown more heated as the economy continues to struggle. Experts point out each sector has advantages and disadvantages when it comes to public- and private-employee compensation and retirement benefits.

Locally, 101 people who have retired since 2000 and worked at a public agency in DeKalb County collect six-figure pensions annually, according to pension data the Daily Chronicle received through Freedom of Information Act requests sent to state and local pension funds.

Additionally, there are 36 retirees – not included in the 101 – in the Teachers’ Retirement System who at some point worked in a DeKalb County school district and now collect a six-figure annual pension. Many of those started at a local district before moving to districts in suburban Chicago.

“The problem with the pensions is not the ones receiving the pensions,” Hammon said. “It’s because the people in Springfield decided not to do what they said they would do.”

Compensation comparisons

Illinois has fallen behind on pension fund payments, resulting in at least $85 billion in underfunded liabilities across the five pension systems the state is responsible for funding. The Teachers’ Retirement System – which Hammon draws from – carries $44 billion in unfunded liability and is set to receive $1.6 billion in back payments from the state this year.

While the state arguably holds the crux of the blame for Illinois’ current pension issues, Andrew Biggs said when it comes to comparing private- and public-sector employees, public employees walk away with the better deal.

Biggs, the former principal deputy commissioner of the Social Security Administration and current scholar at America Enterprise Institute, has studied comparisons between private and public employees for years and recently submitted a report on Ohio’s pensions.

The report found public workers make 43 percent more in total compensation than their private-sector colleagues – a relationship found in most states, though not always at the same percentage, Biggs said.

In Illinois, Biggs said public-sector workers make about 5.8 percent less in salary than comparable private-sector employees.

Biggs said public employees often will make 2-3 percent less in salary compared to private-sector counterparts, but benefits, including retirement, plus the much higher job security, exceed private-sector compensation.

“If you take someone who earns the same wage and run the earnings through public pensions and the private sector, the public employee benefits are much, much higher,” Biggs said.

But not every public employee rakes in a monthly pension of $11,000. The retirees not receiving pensions that high are who Cathy Hill, president of the DeKalb County Retired Teachers Association, is concerned will be hurt the most in the backlash against the pension system.

Proponents of public employees say the focus of pension reformers is often on those making the highest pensions or those who have used loopholes to boost their monthly amount.

The Illinois Taxpayer Education Foundation, for instance, issued a list in April of the top-100 government pensions in the state. Those retirees earned anywhere from $16,250 a month to $34,539.24 a month. In all, the list said 5,294 government retirees in Illinois receive annual pensions greater than $100,000.

But Anders Lindall, spokesman for AFSCME Council 31, said the average annual pension for members in all of the state’s public pension systems is $32,000, and 80 percent does not receive Social Security benefits. AFSCME represents 100,000 active and retired public employees in the state.

Information the Daily Chronicle received through FOIA requests to the statewide pension funds – which includes the systems for teachers, university employees, municipal employees, judges and other state employees – found that of the 3,361 people who have worked at a public agency in DeKalb County and have retired since 2000, 54.33 percent of them – or 1,826 – receive a pension of $32,000 or less annually.

That number does not include information included in the FOIA data the newspaper received from the General Assembly Retirement System, the pension fund that serves the General Assembly and other state officials, because the majority of people on that list have not worked in the county.

The average monthly Social Security benefit for a retired worker was about $1,777 at the beginning of 2011 – or $14,124 a year – according to the Social Security Administration.

Hill said public backlash has increased unfairly in recent years against people who sacrificed higher salaries now for more secure benefits later. The average retired teacher in TRS makes $46,452 per year, while the average retired teacher in DeKalb makes $34,152, said Dick Ingram, executive director for TRS.

“Because of what [the state] did everyone is now mad at the public employees,” Hill said. “It’s not like we created it. ... We stuck with the agreement we made.”

Hill also said many teachers work second jobs but will never receive Social Security benefits from that work, making the pension even more important.

Matter of fairness?

Social Security benefits are under just as much stress as public pension systems, and many private-sector workers rightfully believe their retirement packages are at much greater risk than public employees, said Gavin Wilson, of Country Insurance in DeKalb.

There are stark differences between defined-contribution plans found in the private sector and defined-benefit plans found in the public sphere.

In a defined-contribution plan – where employers’ investments differ greatly – the employer contribution is the compensation the worker receives. That’s opposed to a defined-benefit plan in the public sector where the retirement plan is a guarantee based on salary and years of service.

“There is no doubt a defined-benefit plan is the best retirement package you can get,” Wilson said.

But Wilson added the public-sector versus private-sector compensation is not really a matter of fairness because the state and public employees agreed to a contract. For Wilson, it’s a matter of perspective.

“Whether that money could be better spent is really a capitalism versus socialism question,” he said.

The state recently has taken steps to spend public pension money differently.

On Jan. 1, a new hires package went into effect for state employees and mandated that retirement pay for new hires be calculated based on a maximum salary of $106,800, percentage increases will be more closely tied to inflation and the retirement age for full benefits will be 67 instead of 60.

Called the two-tiered system, it is expected to save the five state-run pension systems $200 billion through 2045. But it does nothing to eliminate the present $85 billion shortfall that would make them fully funded.

And legislation being considered in Springfield would require current participants in the state’s five main pension systems to choose one of three options: Keep pension benefits the same, but employee contributions would jump from 9.4 percent of salary to 13.7 percent of salary; choose the existing benefit package for new hires, which has a lower employee contribution and scaled-down benefits; or a self-managed plan similar to a 401(k).

Changes looming

While the proposed changes might be tough, even some of those who have benefited from the current system know it has been coming.

Thomas Donnelly, a former supervisor for the Illinois Department of Revenue, receives a monthly pension of $7,068. Donnelly, a farmer from Malta who worked for the state for 40 years, said he knows there needs to be changes in this economy, but changes to the health care package already have shifted costs to the employee and put some in a tough spot.

“My pension is large enough that, yes, I am going to survive fairly well, but the people who were only in the system eight to 12 years – those pensions aren’t exorbitant,” he said. “If they start changing health care even more, are these new employees ever going to be able to afford it?”

Hammon said it is frustrating to see stories on employees or union bosses who abused the system by drawing from multiple pensions because the large majority of public employees make modest salaries and pensions.

Hammon said there is no need for honest public employees to apologize for their pension because it was a contract agreed upon between the state and individual.

But he said the state’s inability to live up to those contracts likely will hurt future employees, who already are in a tough position because of the lean job market.

“I do think there will be significant changes,” Hammon said. “It’s just not a good [financial] time right now. People are hurting.”

Both sides to the private-versus-public-sector debate have legitimate gripes, but the reality for Laurence Msall is the state and private business are both struggling.

Because of that, Msall, the president of the non-partisan fiscal policy think tank Civic Federation, has supported the state’s proposed 401(k)-style pension plan for employees.

Msall said the reality of the situation trumps the argument.

“It isn’t so much a question of fairness as it is a matter of financial reality,” Msall said. “It’s not the fault of any individual employee, but [the state] can’t change benefits for retirees so it has to change where it can.”

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