The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
New Hampshire'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.
New Hampshire's pension plan is commended for utilizing a constant benefit multiplier of 1/66 (or 1.52 percent) and for basing retirement eligibility on age, rather than years of service. It ceased using two different multipliers for different periods of service.
The state bases unreduced retirement benefits on age, rather than years of service. All teachers who entered the system on or after July 1, 2011 may not retire with unreduced benefits until age 65, which is almost aligned with Social Security's normal retirement age of 67. The state's timetable for early retirement with reduced benefits, however, is based on years of service, causing unequal treatment of teachers. Only teachers with 30 years of service may apply for early retirement. These policies may encourage effective teachers to retire earlier than they might otherwise, and they also fail to treat equally those teachers who enter the system at a later age and give the same amount of service.
New Hampshire Retirement System, Group I (Employee and Teacher) Member Benefits, revised September 2013
End early retirement eligibility based on years of service.
New Hampshire should change its practice of only allowing teachers with certain years of service to retire early with reduced benefits. If retirement at an earlier age is offered to some teachers with reduced benefits, it should be offered to all teachers equally regardless of years of service.
Align eligibility for retirement with unreduced benefits with Social Security retirement age.
New Hampshire allows teachers to retire before conventional retirement age. 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).
New Hampshire noted that it is important to distinguish between normal and early retirement eligibility.