The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
New York'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 hired on or after April 1, 2012 become Tier 6 members.
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 York's pension plan does not utilize a constant benefit multiplier, regardless of years of service. Tier 6 teachers with less than 20 years receive a benefit under a 1.67 percent multiplier. The multiplier for teachers with 20 years of service is 1.75 percent. Teachers with more than 20 years of service use a multiplier of 1.75 percent for the first 20 years and 2 percent for each year of service after 20. In addition, teachers may retire before standard retirement age based on years of service without a reduction in benefits. Vested teachers can retire with full benefits at age 63 or reduced benefits at age 55. Not only are teachers being paid benefits by the state well before Social Security's retirement age, but these provisions, along with the state's early retirement with reduced benefits based on years of service, may also encourage effective teachers to retire earlier than they might otherwise. They also fail
to treat equally those teachers who enter the system at a later age and give the same amount of service.
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 York should use a pension formula that treats each year of service equally.
Align eligibility for retirement with unreduced benefits with Social Security retirement age.
New York allows all teachers to retire with full benefits at age 63 and reduced benefits at age 55, well 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 York was helpful in providing information that enhanced this analysis. New York also noted that "as stated in prior response letters, NYSTRS is not in agreement with several of the NCTQ goals."