There is a gentleman named Mike Laird who often comments on teacher pension issues. He got me thinking about compensation.
His basic argument is that when the majority of teachers in Illinois pay nothing or under 2% of the 9.4% required contribution to the Teachers Retirement System, that should just be considered a different form of compensation.
Last night it came to me how different it is.
My wife is in Social Security. She had to pay 6.2% until this year, when Congressional Republicans and Democrats cut that to 4.2%. Of course, with the state income tax having been increased by two percentage points, the same amount disappears to a government black hole.
My wife has something called a pension, but it is not a defined benefit plan. Her employer just puts some small percentage of her salary in a very low-paying interest bearing account.
She did, however, have a 401(k) plan in which the employer provided a match to some single digit percentage of her salary. All of that will get taxed when withdrawn by the Federal government, although, if current law continues, it will not be subject to Illinois income tax. It was not taxed on the way in.
When her employer offered the opportunity for her to contribute to a Roth IRA-type of retirement plan, instead of a 401(k), I convinced her to switch.
For the Roth she has to pay Federal and state taxes on the way into the account.
The reward is that she won’t have to pay Federal taxes on the way out. And, of course, the state won’t levy an income tax either.
Teachers do not pay into or get Social Security for their school jobs.
9.4% of their salaries go to the Teachers Retirement System.
For the minority who pay all that 9.4% themselves, the money going in is taxable.
For the majority of teachers who pay nothing themselves or very little toward that 9.4%, both the Federal and state income taxes are avoided on the way in.
Teacher pensions are subject to Federal taxes when withdrawn, but, as with all other retirement income, not subject to the Illinois state income tax.
So, is it fair for teachers not to have pay taxes on money that pays for their pension contribution?
That’s what the comment section is for.