The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
Montana'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.
Montana's pension plan no longer utilizes a constant benefit multiplier for teachers with different years of service. Instead, the plan has a multiplier of 1.67 percent for members who are eligible for normal service retirement and offers a higher 1.85 percent multiplier for members eligible for the "Professional option" (members who retire at age 60 with 30 or more years of service). In addition, Montana's plan does not treat teachers equally, and teachers may retire before standard retirement age based on years of service without a reduction in benefits. Teachers with 30 years of service may retire at age 55, while other vested teachers with less than 30 years of service may not retire until age 60. Therefore, teachers with 30 years of service eligible to retire by age 55 are entitled to 5 additional years of unreduced retirement benefits beyond what other teachers would receive who may not retire until age 60. 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. Finally, Montana increased the number of years for final average salary (FAS) for Tier 2 members, from 3 years to 5 years. A higher number of years for the FAS requirement imply a lower level of benefits for Tier 2 members.
Montana Teachers' Retirement System, Member's Retirement Plan Handbook, July 1, 2013-June 30, 2015
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. Montana should use a pension formula that treats each year of service equally.
End retirement eligibility based on years of service.
Montana should change its practice of allowing teachers with 30 years of service to retire at age 55 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.
Montana allows all teachers to retire before conventional retirement age, as young as 55. 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).
Montana was helpful in providing information that enhanced this analysis.