Pension Neutrality: New Jersey

Retaining Effective Teachers Policy

Goal

The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.

Meets
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Neutrality: New Jersey results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/NJ-Pension-Neutrality-9

Analysis of New Jersey's policies

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). 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 1.66 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. However, vested teachers who entered the system prior to this date may retire with unreduced benefits at age 60 or 62, depending on their date of entry, which means that teachers are receiving unreduced retirement benefits well before Social Security retirement age. In addition, the state's timetable for early retirement with reduced benefits is based on years of service, causing unequal treatment. 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.

Citation

Recommendations for New Jersey

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.

State response to our analysis

New Jersey noted that the enactment of several pieces of pension reform legislation over the last several years have created several tiers of membership in the Teachers' Pension and Annuity Fund with differing ages at which members are immediately vested and may retire on a service retirement. Tier 1 and 2 members enrolled prior to November 2, 2008 may retire at age 60. Tier 3 and 4 members enrolled on or after November 2, 2008 and before June 28, 2011 may retire at age 62.  Tier 5 members enrolled on or after June 28, 2011 may retire at age 65.

The state added that the benefit multiplier differs based on tier membership. The benefit multiplier for Tier 1, 2 and 3 members is 1.81 percent and 1.66 percent for Tier 4 and 5 members.

Last word

The analysis covers the policy for newly hired full-time teachers, as this policy reflects the state's current policy as it moves forward.

Research rationale

NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010).