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). 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 does not utilize a constant benefit multiplier, regardless of years of service. For teachers ages 60 to 64, their benefit equals their average final compensation multiplied by their years of service divided by 60 (1.66 percent multiplier). For teachers ages 65 and older, their benefit is the product of their average final compensation and years of service, divided by 66 (1.515 percent multiplier). Therefore, teachers who retire at a later age, and on average receive benefits for a shorter period of time, will receive lower monthly payouts resulting in a lower total pension wealth even if they worked the same number of years. The state explains the variation in multipliers as a way to increase pension payments for teachers who retire before they reach Social Security retirement age; however, the multipliers are permanent throughout retirees' lives and therefore greatly affect their total pension wealth.
The state does base unreduced retirement benefits on age, rather than years of service. All teachers who entered the pension system prior to July 1, 2011, may retire at age 60; however, this means that teachers are receiving unreduced retirement benefits well before Social Security retirement age. All teachers who entered the system on or after July 1, 2011, may not retire with unreduced benefits until age 65. While this does not fully align with Social Security retirement age, it is much closer. However, the state's timetable for early retirement with reduced benefits is based on years of service, causing further unequal treatment. 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, Plan Details http://www.nhrs.org/Members/PlanDetails.aspx New Hampshire Retirement System, Notices http://www.nhrs.org/Members/Notices.aspx
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. New Hampshire should use a pension formula that treats each year of service equally.
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 Goal 4-H).
The New Hampshire Retirement System did not respond to repeated requests to review NCTQ's analyses related to teacher pensions.