The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
Massachusetts'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.
Massachusetts's pension plan does not utilize a constant benefit multiplier and bases retirement eligibility on years of service. Teachers with 10 years of service qualify for standard retirement at age 60. The multiplier is 2.5 percent for those who retire at age 67, and then it is reduced one-fifteenth of a percentage point for each year below 67 (e.g., 1.45 percent multiplier at age 60, 1.60 percent at age 61, and so on) if creditable service is less than 30 years. It is reduced 0.125 percentage points per year for teachers with 30 or more years of service (e.g. 1.625 percent multiplier at age 60, 1.750 percent at age 61, and so on). Reducing benefits for younger retirees is appropriate because they will on average receive benefits longer, but the state should use an actuarial reduction instead because, depending on a teacher's years of service, a fixed percent reduction in the multiplier may only have a minimal impact on benefits.
Teachers who establish membership after April 1, 2012 automatically participate in the RetirementPlus formula. Under RetirementPlus, teachers who reach 30 years of creditable service receive an additional 14 percent of final average salary plus an additional 2 percent for each year thereafter, not to exceed the maximum benefit amount of 80 percent of final average salary. Therefore, teachers who begin their careers at age 22 can reach their maximum pension benefit by age 57 with 35 years of experience.
The net effect of RetirementPlus is that teachers who retire with 29 years of service at age 60 will have benefits equivalent to 42.05 percent of their final average salaries, while teachers who retire with 30 years of service at age 60 will have benefits equivalent to 62.75 percent, a substantial increase for one additional year of service. Some of 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.
Massachusetts Teachers' Retirement System, Actuarial Valuation Report, January 1, 2016.
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. Massachusetts should end its substantial increase in benefits for teachers with at least 30 years of service, and the state should use a pension formula that treats each year of service equally.
End retirement eligibility based on years of service.
Massachusetts should change its practice of allowing teachers with 20 years of service to retire at any age with standard 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. The state's current policy of reducing the multiplier for each year a teacher retires before age 60 does not achieve this purpose because the reduction is a standard one-tenth rather than an actuarially determined amount.
Align eligibility for retirement with unreduced benefits with Social Security retirement age.
Massachusetts allows all teachers to retire before conventional retirement age, some as young as 57 with maximum benefits. 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).
Massachusetts did not respond to repeated requests to review this analysis.