The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
Maine'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.
Maine's pension plan is commended for utilizing a constant benefit multiplier of 2 percent and for setting a standard retirement age, regardless of years of service, for retirement without a reduction in benefits. Teachers with at least five years of service on July 1, 2010, may retire at age 62 with unreduced benefits. Teachers with less service must reach age 65 to retire with unreduced benefits. However, Maine's eligibility timetable for early retirement is based on years of service. Only teachers with at least 25 years of service may retire at any time, with a reduction in benefits. While the state did increase the age for unreduced retirement, all teachers are still being paid unreduced benefits by the state before Social Security's retirement age, and these provisions fail to treat all teachers equally.
End retirement eligibility based on years of service.
Maine should change its practice of only allowing teachers with 25 years of service to retire early with a reduction in benefits. While its policy is more neutral than most states, If retirement at an earlier age is offered to some teachers with a reduction in benefits, it should be offered to all teachers regardless of years of service.
Align eligibility for retirement with unreduced benefits with Social Security retirement age.
Maine 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).
Maine recognized the factual accuracy of this analysis. However, the analysis has been updated subsequent to the state's review to reflect recent policy changes.