The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
The District of Columbia'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.
The District's pension plan is commended for utilizing a constant benefit multiplier of 2 percent for teachers hired on or after October 1, 1996; however, teachers may retire before standard retirement age based on years of service without a reduction in benefits. Teachers may retire at any age with 30 years of service, or at age 60 with 20 years of service, while other vested teachers with less than 20 years of service may not retire until age 62. Therefore, teachers who begin their careers at age 22 can reach 30 years of service by age 52, entitling them to 10 additional years of unreduced retirement benefits beyond what other teachers would receive who may not retire until age 62. Not only are teachers being paid benefits by the District well before Social Security's retirement age, but these provisions may also 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.
End retirement eligibility based on years of service.
The District of Columbia should change its practice of allowing teachers with 30 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.
The District of Columbia allows all teachers to retire before conventional retirement age, some as young as 52. 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).
The District of Columbia was helpful in providing information that enhanced this analysis.