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' 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 York's pension plan does not utilize a constant benefit multiplier, regardless of years of service. Teachers' years of service 1-24 use a multiplier of 1.66 percent, years 25-30 use a multiplier of 2 percent, and all years beyond 30 years of service are only multiplied by 1.5 percent.
In addition, teachers may retire before standard retirement age based on years of service without a reduction in benefits. Teachers with 30 years of service may retire at age 57, while other vested teachers with less than 30 years of experience may not retire with unreduced benefits until age 62. Therefore, teachers who begin their careers at age 27 can reach 30 years of service by age 57, entitling them to five additional years of unreduced retirement benefits beyond what other teachers would receive who may not retire until age 62. 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.
End retirement eligibility based on years of service.
New York should change its practice of allowing teachers with 30 years of service to retire at age 57 with full benefits. If retirement at an earlier age is offered to some teachers, benefits should be reduced accordingly to compensate for the longer duration they will be awarded.
Align eligibility for retirement with unreduced benefits with Social Security retirement age.
New York allows all teachers to retire before conventional retirement age, some as young as 57. 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).
New York stated that the pension benefit formula is determined by the legislature, as are the plan's retirement ages. Years of service are clearly a part of the benefit formula as the intent is to provide a greater benefit to longer-service teachers. The plan's retirement eligibility is also enacted by the legislature.
The state contended that the pension benefit formula described in the analysis is not correct. The Tier 4 benefit formula, which currently applies to approximately 93 percent of our active membership, provides a benefit multiplier of 1.67 percent for those members whose total years of service at retirement is less than 20. For those with 20 or more years of service, the multiplier is 2 percent for all years of service, except for years of service beyond 30 which receive a multiplier of 1.5 percent. Our recently enacted Tier 5 benefit formula is the same as the foregoing, except the 20-year "break point" is pushed out to 25 years. Although teachers in Tier 4 who have accumulated less than 30 years of credit service may not retire with an unreduced benefit until age 62, Tier 4 teachers with 30 years of credited service may retire as early as age 55 with an unreduced benefit. The age 57 threshold for receiving unreduced benefits with 30 years of credited service described in the NCTQ analysis applies to teachers in the recently enacted Tier 5. This eligibility structure favoring the retirement of long-service teachers at the ages specified reflects a public policy determination of the legislature to encourage the retirement of long-serving teachers as a way of rejuvenating the ranks of public school teachers.