The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
The California Public Employees' Pension Reform Act of 2013 made significant changes to the benefits for members first hired on or after January 1, 2013. 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.
Members hired on or after January 1, 2013 fall under the "2% at 62" Plan. Under this plan, vested teachers may retire with unreduced benefits at age 62. The plan's multiplier is 2 percent for normal retirement and increases to 2.4 percent at age 65. Members may retire early at age 55 with a lower multiplier, 1.16 percent. Teachers under the "2% at 62" Plan have their final average salary calculated as the final three years of salary, regardless of years of service. Under the previous plan, final average salary was based on the last year's salary with 25 years of service instead of the last three year's salaries. Although the "2% at 62" Plan does not base retirement benefits on years of service, it allows teachers to retire well before Social Security age.
The California State Teachers' Retirement System, 2015 Member Handbook, revised January 2015.
Align eligibility for retirement with unreduced benefits with Social Security retirement age.
California allows 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).
California was helpful in providing information that enhanced this analysis.