The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
Nebraska'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.
Nebraska'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 who meet the "Rule of 85" can retire at age 55, while other vested teachers may not retire with unreduced benefits until age 65. To qualify for the "Rule of 85," a teacher's age plus years of service must equal 85. Therefore, teachers who begin their careers at age 25 can qualify for the "Rule of 85" with 30 years of service by age 55, entitling them to 10 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 early, and they fail to treat equally those teachers who enter the system at a later age and give the same amount of service. In addition, the benefit formula for Tier 2 members uses the last five years of a teacher's final average salary versus 3 years for Tier 1 members, resulting in a lower level of benefits for Tier 2 members. Tier 2 also provides a lower cost-of-living adjustment than Tier 1, resulting in lower benefits for Tier 2 members. Such changes treat teachers under these two plans differently.
Nebraska Public Employees Retirement Systems, Nebraska School Employees Retirement System Handbook (revised January 2015).
End retirement eligibility based on years of service.
Nebraska should change its practice of allowing teachers whose age and years of service equal 85 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.
Nebraska allows all teachers to retire before conventional retirement age, some 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).
Nebraska was helpful in providing information that enhanced this analysis.