The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
Arkansas's pension system is based on a benefit formula that is not neutral, meaning that each year of work does not accrue pension wealth in a uniform way until teachers reach conventional retirement age, such as that associated with Social Security.
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 larger 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.
Arkansas's pension plan is commended for utilizing a constant benefit multiplier of 2.15 percent; however, teachers may retire before standard retirement age based on years of service without a reduction in benefits. The state allows teachers with 28 years of service to retire at any age, while other vested teachers with less than 28 years of service may not retire until age 60. Therefore, teachers who begin their careers at age 22 can reach 28 years of service by age 50, entitling them to 10 years of additional retirement benefits beyond what other teachers would receive who may not retire until age 60. Not only are teachers being paid benefits by the state well before Social Security's retirement age, but these provisions, along with the state's early retirement with reduced benefits based on years of service, may also encourage effective teachers to retire earlier than they may otherwise. They also fail to treat equally those teachers who enter the system at a later age and give the same amount of service.
Arkansas Teachers' Retirement System, Comprehensive Annual Financial Report, for Fiscal Year ended June 30, 2015.
End retirement eligibility based on years of service.
Arkansas should change its practice of allowing teachers with 28 years of service to retire at any age with full benefits. If retirement at an earlier age is offered to some teachers, benefits should be reduced accordingly to compensate for the longer duration they will be awarded.
Align eligibility for retirement with unreduced benefits with Social Security retirement age.
Arkansas allows all teachers to retire before conventional retirement age, some as young as 50. 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).
Arkansas did not respond to repeated request to review this analysis.