The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
Louisiana's pension system is based on a benefit formula that is not fully 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.
Louisiana's pension plan is commended for utilizing a constant benefit multiplier of 2.5 percent. In addition, the state is commended for basing retirement eligibility on age, regardless of years of service. However, vested teachers may retire at age 60 without a reduction in benefits allowing teachers to be paid full benefits by the state well before Social Security's retirement age. This provision, along with the state's early retirement based on years of service, 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.
Teachers' Retirement System of Louisiana Member Handbook, January 2011 http://trsl.org/uploads/File/Brochures/memberhandbook.pdf
Align eligibility for retirement with unreduced benefits with Social Security retirement age.
Louisiana allows teachers to retire before conventional retirement age. 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). 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.
Louisiana noted that NCTQ concludes that Louisiana's pension system is based on a benefit formula that is not neutral and that NCTQ finds that 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. The state reiterated that members of Teachers Retirement System of Louisiana (TRSL) hired on or after January 1, 2011 must reach age 60 to qualify for regular retirement benefit. For members prior to January 1, 2011, to be eligible for regular retirement, a TRSL member must achieve 30 years of service, 25 years of service at age 55 or five years of service at age 60. The retirement benefit for all regular retirees is determined using the following formula: years of service x 2.5 percent x final average compensation. This allows for a uniform determination of benefits, whether an employee begins employment in the teaching profession at age 25 or 35, thus treating all members equally regarding the benefit amount to be received based on years of service. The TRSL plan provides an incentive to career educators and increases longevity in the profession, while, with a five-year vesting, permitting all vested members to retire at age 60. TRSL's current regular retirees retired on average at 57.85 years of age. In addition, TRSL has a Deferred Retirement Option Plan, which results in many members working past retirement eligibility. Louisiana encouraged NCTQ to review other factors that may affect retirement decisions such as spousal retirement and health status, as well as the effect of retirement eligibility age increase on entry into the teaching profession.
The analysis states that Louisiana's pension system is based on a benefit formula that is not neutral because wealth does not accrue uniformly until teachers reach conventional retirement age, such as that associated with Social Security. The state's retirement age of 60 is well before the normal retirement age of Social Security and creates a large, uneven spike in wealth when teachers reach age 60. The state also has early retirement based on years of service, which creates additional spikes in pension wealth.
The analysis covers newly hired teachers, as their plans reflect the state's current policy. Teachers hired prior to January 1, 2011, do not have a neutral formula and have even more spikes in pension wealth.
Benefits are determined uniformly, regardless of the age a person entered teaching in Louisiana. However, with eligibility for regular or early retirement set on years of service, total wealth of benefits is not accrued evenly. The person that entered teaching earlier in life will reach retirement eligibility based on years of service earlier than someone who started later in life. Their pensions each month would be the same, but the person who started earlier would receive the benefit, on average, for a longer period of time and therefore have received a higher amount of total benefits, or total pension wealth.
As for the state's DROP program, it is only a temporary fix to the structural problem of allowing early retirement without reduced benefits. This is discussed further in the rationale for this goal.