The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
Connecticut'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 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.
Connecticut has two different formulas for retirement based on years of service. To qualify for standard retirement, a teacher must have 35 years of service credit (25 of which must have been earned in Connecticut), or must have 20 years of service credit in Connecticut and be at least age 60. Therefore, teachers who begin their careers at age 22 can reach 35 years of service by age 57, entitling them to three years of additional unreduced retirement benefits beyond what other teachers would receive who may not retire until age 60. Both of these teachers are being paid benefits by the state well before Social Security's retirement age. The formula for standard retirement utilizes a constant benefit multiplier of 2 percent for all years of service.
Connecticut also has an alternate formula for teachers with less than 20 years of service. Teachers with 10 to 20 years of service must be 60 years old to retire, and a lower multiplier is used to calculate retirement benefits. The multiplier is 10 percent of the total years of Connecticut service. For example, a teacher with 16 years of service has a multiplier of 1.6 percent. After this percentage is multiplied by the number of years of Connecticut service, teachers who purchased time add only an additional 1 percent to their benefit formula for each year of purchased service. Thus, the formula and the value of purchased time vary greatly based on years of service.
In addition, early retirement with reduced benefits is available at any age to teachers with 25 years of service (20 of which must have been in Connecticut), or at age 55 to teachers with 20 years of service (15 of which must have been in the state).
Not only are Connecticut teachers being paid unreduced benefits by the state well before Social Security's retirement age, but its provisions also may encourage effective teachers to retire early, and they fail to treat equally those teachers who enter the system at a later age and give the same amount of service.
Retirement Overview, http://www.ct.gov/trb/lib/trb/formsandpubs/retirementpresentation.pdf (accessed 9/5/2016). Normal retirement, http://www.ct.gov/trb/cwp/view.asp?a=1579&Q=272094&trbPNavCtr=|#41333 Early retirement, http://www.ct.gov/trb/cwp/view.asp?a=1579&Q=272096&trbPNavCtr=|#41334 Proratable retirement, http://www.ct.gov/trb/cwp/view.asp?a=1579&Q=272098&trbPNavCtr=|#41335
Utilize a constant benefit multiplier to calculate retirement benefits for all teachers, regardless of years of service.
Each year of service should accrue equal pension wealth. Connecticut should use a pension formula that treats each year of service equally.
End retirement eligibility based on years of service.
Connecticut should change its practice of allowing teachers with 35 years of service to retire at any age and teachers with 20 years of service to retire at age 60, both 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.
Connecticut allows all teachers to retire before conventional retirement age, some as young as 57. 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).
Connecticut did not respond to repeated requested to review this analysis.