The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
Minnesota's pension system is based on a benefit formula that is neutral, meaning that each year of work accrues pension wealth in a uniform way until teachers reach Social Security age.
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.
Minnesota's pension plan is commended for utilizing a constant benefit multiplier of 1.7 percent for service through June 30, 2006, and 1.9 percent for service earned after that date. Vested teachers in Tier II of the state's pension system may retire with unreduced benefits at the retirement age that they would qualify for unreduced Social Security retirement benefits, or age 66, whichever comes first. Early retirement with reduced benefits is available to all vested teachers at age 55.
Minnesota Teachers Retirement Association, Actuarial Valuation Report for fiscal year ended June 30, 2015. Minnesota Teachers Retirement Association, Handbook of Benefits & Services, September 2015.
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