NEW IPO Logo - by Charles Larry Home Search Browse About IPO Staff Links


Early retirement for teachers:
Pandora's box for pensions?

THE NEW no-penalty early retirement law for teachers has opened a Pandora's box for state pensions. The Taxpayers' Federation of Illinois calls it "putting public pensions up for sale."

Under the new law, effective August 1, 1979, elementary and secondary teachers can quit teaching at age 55 without taking a cut in their pensions. Under prior law, early retirement was penalized through a diminished pension. The new law covers down-state teachers outright, but leaves the decision for Chicago teachers to the Chicago School Board. Funding remains the same: teachers pay into the system each year, and school boards contribute only once, when the teachers retire (the school board pays approximately 75 percent of this onetime contribution with the state picking up the difference).

Dropping penalities will increase the state's share, but apparently, it won't impair the state's ability to pay. The new law, however, raises old questions. What if all state employees were allowed to retire early without penalties? Could the state afford it?

Observers have long questioned the state's 'pay-as-you-go" policy of funding its share of pensions contributions and warn that a mounting liability eventually will erupt in default. Legislators haven't pushed for a pay-in-advance" policy. But they have held the line on increasing benefits like early retirement, which only pile up a bigger debt. Now observers say the new law is an alarming reversal of the anti-benefit trend. They point to the costly no-penalty provision as a dangerous precedent: elementary and secondary teachers, who comprise the largest pension system, now have no-penalty early retirement. Employees in the state's 15 other pensions systems probably will demand equal rights as early as next year.

No-penalty early retirement for teachers is expected to increase the state's share of the cost of teacher pensions by $1.2 million per year downstate, according to Roy Baker, executive director of the Downstate Teachers Retirement System. Actuarial Studies (August 31, 1978) shows the state's share would go up $300,000 per year for Chicago, according to James F. Ward, executive director of the Chicago Teachers Pension and Retirement System. Thus, dropping penalties could increase the state's share by $1.5 million per year, Baker and Ward said.

Aside from the increase in the state's share, what effect will no-penalty early retirement have? Legislators finally may push for a "pay-in-advance" policy of funding. One such bill, which suggested amortizing the unfunded liability over 40 years, was sent to the governor this year, but he had not acted on it by August 29. However, switching to a "pay-in-advance" policy would increase the state's regular bond debt. It's more likely that no-penalty early retirement means the end of expanded benefits for years to come. Either way, the new law will force another look at the "pay-as-you-go" policy, which in 1978 called for funding pensions at 49 percent for down-state teachers and 42 percent for Chicago teachers.

The new law affects only teachers who have 20 years experience and want to retire at age 55 rather than at 60. About 6,000 of the state's 110,000 teachers will be eligible for early retirement at the end of the 1979-80 school year, according to the Illinois Education Association. But most teachers who are eligible probably won't take advantage of the new law unless they have an outside income, Baker and Ward said.

Before, only teachers with 35 years experience could quit at age 55 without taking a 6 percent cut in pension for each year they didn't work under age 60. Pensions are based on teachers' experience, rather than their age at retirement.

To get the maximum pension, which is 75 percent of salary, teachers worked 38 years. The minimum pension is 35.7 percent after 20 years of experience.

Under the new law, teachers still must work 38 years to get the 75 percent pension and 20 years to get the 35.7 percent pension, but they can quit at age 55 without any penalty for not working until age 60, which would be 30 percent under the prior law. Teachers make a final payment into the system, which roughly represents what they would have paid annually to age 60.

So, teachers get a break, paying less on lower salaries. Before, if a teacher worked until 60, he continued to pay into the pension system at the rate of 8 percent of his salary per year, for a total of 40 percent between age 55 and 60. Now, if a teacher retires at age 55, he pays into the system once, at the rate of 35 percent of the average of his last four years' salaries. (The percentage rate drop for each age group to a final payment of percent at age 59.)

It's a major victory for the Illininois Education Association which calls the new law the "most significant piece of education legislation signed in years."

But it's a burden for school boards something the Illinois Association of School Boards calls a "mandate without funding A school board will pay 100 percent of the average four years' salary of a teacher retiring at age 55. (The rate drops to 20 percent when teachers retire at age 59,) The cost could run into the hundreds of to sands of dollars per year in larger districts despite the fact the new law sets a limit on retirees. Only 30 percent of those eligible in each district can retire in a single year,

But it's an even bigger burden on tax payers, who indirectly foot the bill through property taxes. In some cases, it's a double burden. Many boards pay the teachers' 8 percent annual share as part of salary benefit packages. Thus taxpayers in those districts indirectly pay for the teachers' annual share as well as the board's onetime share.

"This is not a perfect solution to a very complex problem," Gov. James R. Thompson said, signing the legislation. "But it is a necessary beginning in this period of declining enrollments and increasing costs."

Thompson thinks the increased school board share will not be a problem. "The increased cost to the boards will be offset by savings," he said, echoing IEA views. The IEA feels the increased cost of the boards' onetime share will be offset by a continuous savings in replacing high-salaried experienced teachers with low-salaried beginners ----- or by not replacing them at all.

"There's no question that the first year it's going to cost them [boards] something,"said Larry Lawlyes of the IEA. "But after two years, they'll be able to realize a net profit." "There is no savings to the districts, just the opposite," argued Ron Cardoni of the IASB. "In effect, we are buying up the discount."

Thompson also said the new law would curb the common practice of inflating salaries to push up pensions. Now the last year's salary can go up no more than 20 percent.

The legislation, S.B. 375, sponsored by Sen. Jack Schaffer (R., Crystal Lake) and Rep. Larry Stuffle (D., Charleston) became Public Act 81-150, effective August 1, 1979.

26/ October 1979/ Illinois Issues

|Home| |Search| |Back to Periodicals Available| |Table of Contents| |Back to Illinois Issues 1979|
Illinois Periodicals Online (IPO) is a digital imaging project at the Northern Illinois University Libraries funded by the Illinois State Library