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Your Payroll Contributions are a Big Deal!
By Dan Ryan, IPPFA Project Coordinator
October 2026
Police and fire professionals in Illinois make substantial payments to their eventual pension benefits. This is not appreciated by critics of public pensions and the reporters and editors who often cover public finance. They claim that public employees only contribute a small amount of money to their pensions or that they “get back” all of their contributions in less than two years. IPPFA was fortunate to have a letter published in the Chicago Tribune to rebut these arguments (December 4, 2018 from Jim McNamee), but that hasn’t slowed them down.
This article provides background information on payroll contributions and examines their impact on pension financing.
Nature of Defined Benefit Plans
In a defined benefit pension plan such as ours (“DB” for short in pension parlance), a calculated benefit is guaranteed to the member. This is different than the defined contribution world (“DC”) such as 401k plans where the member contributes, the employer contributes, and those two sums create investment earnings through the working years. Retirement income in a DC plan is whatever the account balance will support.
But our Illinois public pensions share something in common with the DC universe. We do make contributions from our paychecks.
Public Employee Pension Contributions
Payroll contributions are unique to the public sector. I’ve only seen one corporate pension plan that had employee payments. That doesn’t mean that there aren’t others – but it’s rare. The union negotiated plans (known as Taft-Hartley plans) do not have payroll contributions. The benefits are fully paid by the companies participating in the pension plan. But any public employee retirement system that I have ever seen has member contributions as part of their financing. And some amounts are substantial.
How did this come to pass? Well I stumbled upon what I think is the answer a few years back in a pension textbook. The earliest approach to public employee retirement was in New York City at the turn of the prior century. An arrangement was made for NYPD police and city teachers to pay money into a retirement savings plan and the city matched the amount. This was long before Section 401k was adopted and may have even pre-dated the establishment of the federal income tax. Eventually those plans matured into a real pension plan. And, since employees had been paying some of their own money into the account, that feature was retained as part of the pension plan funding mechanism. And as other pension systems were established for police, fire, teachers and other public workers across the country, an employee contribution was maintained. It just became part of the landscape for public pension funding.
Payroll Contributions Today
Employee payday contributions today are substantial. They run higher in pension plans where the workers are not covered by Social Security and higher still for public safety members because of their earlier retirement ages and the higher incidence of disability. So in Illinois for example, an office worker or building inspector in the Illinois Municipal Retirement Fund (IMRF) pays 4.5% of pay. This funds lower benefits than the police/fire formula but it is companioned with Social Security where the member pays 6.2%. IMRF-SLEP for sheriff members has a 7.5% contribution rate plus Social Security. Chicago PD and FD are 9%, “Downstate” fire is 9.455% and police is 9.91%. Chicago is not in Social Security and most of the Downstate groups are also not covered under Social Security.
What do your pension contributions do?
Payroll contributions simply help fund the pension benefit. They are recorded in a nominal account to the benefit of the member but that is only important (a) in the event of a withdrawal refund to someone who leaves before becoming “vested” in the pension plan (i.e. eligible for a monthly benefit) or (b) under certain fund-to-fund transfer formulas.
The member contributions, along with the amount paid in by the municipality or fire protection district, are invested for long term returns and the aggregate amount of money from all sources is used to pay current and future pension benefits.
Unlike in a 401k style plan, there is no employer “match” of what you pay in and there is no direct relationship between how much you pay in and what you receive in pension benefits. Picture identical twin brothers who come on the job the same day and retire as deputy chiefs thirty years later. One is a great civil service test taker and successfully goes up for promotion every time he is eligible. The other is more of a “take it slow” kind of guy who stays in the lower ranks longer than his brother but eventually attains the same rank at retirement. The fast-track guy (Mom probably liked him best!) paid a lot more in pension contributions than his brother. And the fund earned a lot more interest on his money. But their pensions are the same. That’s the way the system works. Payments from the paycheck help fund the system, not earn a member a specific benefit.
What is the impact of these contributions?
It’s big. The naysayers ignore the investment earnings that employee payroll contributions earn from the first day of work until the last pension check, usually six decades later. That is a lot of time for member’s personal contributions to turn into some real money.
In fact, it is estimated that public employees pay somewhere between 30 percent and 40 percent of their own pensions, once future earnings on their payroll deductions are considered. The taxpayers (and the investment earnings on taxes) pay the rest. This ratio of member-to-taxpayer contribution is supported by various actuaries’ calculations of the Normal Cost contribution and by IMRF’s public graphics of member-taxpayer-investment funding of pension plans.
In other words, both member and taxpayer substantial amounts and both should receive appropriate credit.
Closing
We hope this article improves your objective knowledge of public employee pension contributions. Your personal money pays probably a third or more of your pension. Subjectively, this is a meaningful contribution. Ignore statements or claims that you don’t pay enough.
Any questions or just a comment? They can be sent to Dan.ryan@ippfa.org
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