Retaining Effective Teachers Policy
The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
North Dakota'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.
North Dakota's pension plan is commended for utilizing a constant benefit multiplier of 2 percent; however, teachers may retire before standard retirement age based on years of service without a reduction in benefits. Teachers may retire when they are at least 60 years of age and qualify for the "Rule of 90," meaning age plus years of service equal 90, while other vested teachers may not retire until age 65. Therefore, teachers who begin their careers by age 30 can reach the "Rule of 90" with 30 years of service by age 60, entitling them to five additional years of unreduced retirement benefits beyond what other teachers would receive who may not retire until age 65. These provisions may encourage effective teachers to retire earlier than they might otherwise, and they fail to treat equally those teachers who enter the system at a later age and give the same amount of service.
North Dakota Teachers' Fund for Retirement Member Handbook, effective August 1, 2011 http://www.nd.gov/rio/TFFR/Publications/Handbook.pdf
End retirement eligibility based on years of service.
North Dakota should change its practice of allowing teachers whose age and years of service equal 90 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.
North Dakota allows all teachers to retire before conventional retirement age, some as young as 56. 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).
North Dakota restated that to improve funding levels, the 2011 state legislature approved benefit modifications in addition to contribution rate increases as described in Goal 4-H. For non-grandfathered Tier 1 employees, and all Tier 2 employees, the eligibility age for unreduced retirement benefits will increase to minimum age 60 for members with the Rule of 90, or minimum age 65 for those members without the Rule of 90. Also, the reduction factor will increase from 6 percent to 8 percent per year for those members who retire before normal retirement age. School districts, teachers and administrators supported the contribution and benefit changes recognizing the importance of a well-funded defined benefit plan.
The state is commended for moving retirement eligibility more in line with Social Security retirement age; however, eligibility based on years of service still remains, which creates uneven accrual of pension wealth.