Pension Neutrality: Mississippi

2011 Retaining Effective Teachers Policy

Goal

The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.

Does not meet
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Neutrality: Mississippi results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/MS-Pension-Neutrality-9

Analysis of Mississippi's policies

Mississippi'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.

Mississippi's pension plan does not utilize a constant benefit multiplier, regardless of years of service. Instead, for teachers who enter the system on or after July 1, 2011, the plan's multiplier is 2 percent for years one through 30, and then 2.5 percent for each additional year beyond 30 years of service.

In addition, teachers may retire before standard retirement age based on years of service without a reduction in benefits. Teachers who become members of the system on or after of July 1, 2011, may retire with 30 years of service at any age, while other vested teachers with less than 30 years of service may not retire until age 65. Therefore, teachers who begin their careers at age 22 can reach 30 years of service by age 52, entitling them to 13 additional years of unreduced retirement benefits beyond what other teachers would receive who may not retire until age 65. Not only are teachers being paid benefits by the state well before Social Security's retirement age, but these provisions may also 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 who became members of the pension system prior to July 1, 2011 may retire with 25 years of service at any age or at age 60 once vested. Their multiplier is 2 percent for years one through 25 and 2-1/2 percent for each additional year beyond 25 years of service.

Citation

Recommendations for Mississippi

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. Mississippi should use a pension formula that treats each year of service equally.

End retirement eligibility based on years of service.
Mississippi should change its practice of allowing teachers with 30 years of service to retire at any age 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.
Mississippi allows all teachers to retire before conventional retirement age, some as young as 52. 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).

State response to our analysis

Mississippi recognized the factual accuracy of this analysis. The state added that any statements about what the plan should offer to its participants are a matter of opinion and are best addressed by state policy makers.

Mississippi noted that in 1999, the Mississippi legislature enacted legislation to increase the retirement formula from 1-7/8 of final average compensation to 2 percent of final average compensation for the first 25 years of creditable service, and from 2 percent to 2.5 percent of final average compensation for all years after 25 years. The formula for years after 25 was increased in part as an incentive for employees to work longer to increase the multiplier that would be used in calculating their retirement allowances.

In 2000, the Mississippi legislature enacted legislation to provide for a partial lump sum distribution for those employees who retire with 28 or more years of creditable service as an incentive for employees to work longer.

In 2010, the Mississippi legislature enacted legislation to establish 30 years as the number of years of creditable service required for retirement regardless of age for persons who become members of the system on or after July 1, 2011, in recognition of the fact that individuals are living longer.

In 2011, the Mississippi legislature established the retirement formula for persons who become members of the System on or after July 1, 2011, as 2 percent of average compensation for each of the first 30 years of creditable service and 2-1/2 percent of average compensation for each year beyond 30 years, with no minimum monthly benefit. The new law provides for an actuarial reduction in the benefit for each year of creditable service below 30 years, or the number of years in age that the member is below age 65, whichever is less, for persons who become members of the system on or after July 1, 2011, again in recognition of longer life expectancies.

Last word

Mississippi did move its retirement eligibility slightly later by increasing the years of service, but it still allows members to retire based on years of service creating unnecessary spikes in wealth; the state also maintains a formula that does not treat all years of service equally. A more balanced way to incentivize workers to work longer would be to set retirement eligibility to align with Social Security. Mississippi still allows teachers  to retire with unreduced benefits as early as age 52, if they began teaching at age 22. This is well before Social Security age and does not take rising life expectancies into consideration.

How we graded

It is unfair to all teachers when pension wealth does not accumulate in a uniform way.

In addition to the ways defined benefit pension systems disadvantage teachers described in Goal 4-G, the way pension wealth accumulates in some systems further compounds the inequity. All pension systems use a multiplier to calculate the benefits an individual is entitled to receive based on salary levels and years of service. For example, a pension system may have a multiplier of 2.0. In such case, pension benefits are determined by multiplying average final annual salary by years of service and then multiplying the product by 2.0. Thus, someone working fewer years with a lower final salary would appropriately receive less in benefits than someone with more years of service and/or a higher final salary. However, the multiplier in many pension systems is not fixed; it increases as years of service increase. When a higher multiplier is used, teachers receive even more generous benefits.

Another way that pension benefits are awarded unfairly is through the common policy of setting retirement eligibility at different ages and years of service. For example, in a given state, a teacher with 30 years of service may retire at age 55, while teachers with fewer years of service may not retire until age 62. This means that a teacher who started teaching in this state at age 25 would reach 30 years of service at age 55 and receive seven additional years of full retirement benefits beyond what a teacher that started at age 32 and cannot retire with full benefits until age 62 would receive. A fair system would set a standard retirement age for all participants, without factoring in years of service.

Pension systems affect when teachers decide to retire as they look to maximize their pension wealth.

The year teachers reach retirement eligibility by age and/or years of service, their pension wealth peaks; pension wealth then declines for each year they work beyond retirement age. Plans that allow retirement based on years of service create unnecessary peaks, and plans that allow a low retirement age create an incentive to retire earlier in one's career than may be necessary. For every year teachers continue to work beyond their eligibility for unreduced retirement benefits, they lose that year of pension benefits, thus decreasing their overall pension wealth.
Although their yearly pension benefits would continue to rise as they earn additional service credit, it would only be at a small percentage per year, which would not make up for the loss of each year of benefits.

To try to balance this incentive to retire, some states have created DROP (Deferred Retirement Option Plan) programs. DROP programs allow participants to place their monthly pension benefits in a private investment account while still teaching and earning a salary, thus retaining those benefits. These teachers are, in effect, earning their pension and salary at the same time, and often at a relatively young age.

A DROP program is a band-aid on the problem; it does not fix what is structurally wrong: retirement at an early age without reduction of benefits. For example, the hypothetical teacher above decides to forgo retiring at age 47 in order to wait and qualify for her state's DROP program at age 55. She now has 33 years of service and has reached a pension equal to 66 percent of her salary. She remains in DROP for the maximum allowable five years. During that time, her five years of lost pension benefits plus her five years of mandatory employee pension contribution have been deposited in a private investment account. Upon retiring at age 60, she would receive the total of that private account plus a lifetime pension benefit annually of 66 percent of her final salary. With the lump-sum payment of her DROP account and monthly pension benefit, she will receive 100 percent of her final average salary for at least 10 years, and, depending on the state, she may also receive Social Security benefits. This generous guaranteed payout would be hard to find in any other profession.

DROP programs do create an incentive for some teachers to remain past their eligible retirement age, but at a high cost. DROP programs mean that districts still must find the funds to pay pension benefits to teachers at a relatively young age when those dollars could be more effectively spent.

Research rationale

NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010).