The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
The state recently enacted new provisions to its pension law and created a new tier which raised the retirement age for teachers becoming members on and after January 1, 2013. Under the old tier, teachers could retire at any age with 25 years of service or age 60 after vesting. Under the new law, new teachers who vest can retire at age 62. Because retirement now depends solely on age rather than years of service, the benefit formula is more neutral for members, meaning that each year of work accrues pension wealth in a fairly uniform way until reaching age 62.
Teachers' retirement wealth is determined by their monthly payments and the length of time they expect to receive those payments. Monthly payments are usually calculated as final average salary multiplied by years of service multiplied by a set multiplier (such as 1.5 percent). Higher salary, more years of service or a greater multiplier increases monthly payments and results in greater pension wealth. Earlier retirement eligibility with unreduced benefits also increases pension wealth, because more payments will be received.
To qualify as neutral, a pension formula must utilize a constant benefit multiplier and an eligibility timetable based solely on age, rather than years of service. Basing eligibility for retirement on years of service creates unnecessary and often unfair peaks in pension wealth, while allowing unreduced retirement at a young age creates incentives to retire early. Plans that change their multipliers for various years of service do not value each year of teaching equally. Therefore, plans with a constant multiplier and that base retirement on an age in line with Social Security are likely to create the most uniform accrual of wealth.
Alabama's pension plan is commended for utilizing a constant benefit multiplier of 1.65 percent. It is also commended for changing its pension law so that retirement eligibility is based on age rather than years of service. Teachers hired on or after January 1, 2013 and who vest in the system must wait until age 62 to collect pension benefits. Teachers, however, can still retire before Social Security's normal retirement age.
Teachers' Retirement System of Alabama, Tier 2 Member Handbook
Align eligibility for retirement with unreduced benefits with Social Security retirement age.
Alabama allows all teachers to retire before conventional retirement age. As life expectancies continue to increase, teachers may draw out of the system for many more years than they contributed. This is not compatible with a financially sustainable system (see pension sustainability goal).
Alabama did not respond to repeated requests to review this analysis.