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). 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.
Hawaii's pension plan is commended for utilizing a constant benefit multiplier of 2 percent; however, teachers may retire before standard retirement age based on years of service without a reduction in benefits. Teachers with 30 years of service may retire at age 55, while vested teachers may not retire until age 62. Therefore, teachers who begin their careers at age 25 can reach 30 years of service by age 55, entitling them to seven additional years of unreduced retirement benefits beyond what other teachers can receive who started their careers at age 32 and cannot retire with unreduced benefits until age 62. Not only are teachers being paid benefits by the state well before Social Security's retirement age, but these provisions, along with the state's early retirement with reduced benefits based on years of service, may also 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.
Recent legislation makes changes to the pension benefits of new Hawaii teachers hired on or after July 1, 2012. The multiplier will decrease to 1.75 percent, teachers with 30 years of service may retire at age 60 without a reduction in benefits and those with less than 30 years of service may retire at age 65. While Hawaii did move its retirement ages more in line with Social Security, retirement based on years of service rather than age remains, which does not treat all years of work equally.
State of Hawaii, Employees' Retirement System http://ers.ehawaii.gov/ Act 163 SLH 2011
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 Goal 4-H).
Hawaii recognized the factual accuracy of this analysis. The state was also helpful in providing facts that enhanced this analysis.