The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
New Jersey is commended for offering a defined contribution plan that is neutral, allowing teachers' pension wealth to increase in a uniform way.
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 Jersey's pension plan is commended for utilizing a constant benefit multiplier of 1.67 percent and for basing retirement eligibility on age, rather than years of service. Vested teachers who became members of the system on or after June 28, 2011, may retire at age 65, which is almost aligned with Social Security retirement age. The state's timetable for early retirement with reduced benefits, however, is based on years of service, causing unequal treatment of teachers. Under early retirement, members can retire with reduced benefits at any age with 30 years of service. 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 later in life.
State of New Jersey Teachers' Pension and Annuity Fund, Member Handbook, June 2016.
End early retirement eligibility based on years of service.
New Jersey 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 regardless of years of service.
New Jersey recognized the factual accuracy of this analysis.