Pension Neutrality: Mississippi

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

Public Employees' Retirement System of Mississippi, Member Handbook http://www.pers.state.ms.us/pdf/memberservices/handbooks/Member_Handbook_2011.pdf

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.