The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
Hawaii'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.
Recent legislation changed pension benefits of new Hawaii teachers hired after June 30, 2012. Hawaii's pension plan is commended for utilizing a constant benefit multiplier of 1.75 percent and moving retirement ages more in line with Social Security. Teachers with 30 years of service may retire at age 60, while vested teachers may not retire until age 65. These retirement rules, however, remain based on years of service rather than age and, therefore, do not treat all years of work equally. Along with the state's early retirement (reduced benefits as early as age 55 with 25 years of service), these provisions may encourage effective teachers to retire early. They also fail to treat equally those teachers who enter the system at a later age and give the same amount of service.
Hawaii Employees' Retirement System, Actuarial Valuation Report for fiscal year ended June 30, 2015.
End retirement eligibility based on years of service.
Hawaii should change its practice of allowing teachers with 30 years of service to retire at age 55 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.
Hawaii allows all teachers to retire before conventional retirement age, some as young as 55. 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).
Hawaii was helpful in providing information that enhanced this analysis.