The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
Florida is commended for offering a defined contribution plan that is neutral, allowing teachers' pension wealth to increase in a uniform way.
Florida's defined benefit pension system, however, 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 in a defined benefit plan 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.
Florida's defined benefit pension plan does not utilize a constant benefit multiplier. Instead, the state's multiplier is a step function, equal to 1.6 percent for retirement with 30 years of service or at age 65,1.63 percent for retirement with 34 years of service or at age 66, 1.65 percent for retirement with 35 years of service or at age 67, and 1.68 percent for retirement with 36 years of service or at age 68.
In addition, teachers in the defined benefit pension plan may retire before standard retirement age based on years of service without a reduction in benefits. Teachers with 33 years of service may retire at any age, while other vested teachers with at least 8 years of service but less than 30 years of service may not retire until age 65. Therefore, teachers who begin their careers at age 22 can reach 33 years of service by age 55, entitling them to 13 additional years of unreduced retirement benefits beyond what other teachers would receive who may not retire until age 65. Not only are some of these teachers being paid benefits by the state well before Social Security's retirement age, but also these provisions 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.
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. Florida's defined benefit pension plan should use a pension formula that treats each year of service equally.
End retirement eligibility based on years of service.
Florida should change its defined benefit pension plan's practice of allowing teachers with 30 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.
Florida allows all teachers in its defined benefit plan 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).
Florida did not respond to repeated request to review this analysis.