The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
Rhode Island is commended for offering a pension plan that is based on a neutral benefit formula. This means that each year of work accrues 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 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.
Rhode Island is commended for utilizing a constant benefit multiplier of 1 percent for the defined benefit plan. The state is also commended for basing retirement on age rather than years of service. Employees retire at the age that matches Social Security's normal retirement age, and they may not retire earlier. Thus, unlike most public pension plans, these provisions do not encourage effective teachers to retire earlier than they may otherwise, and they treat equally those teachers who enter the system at a later age and give the same amount of service.
Employees' Retirement System of Rhode, An Employee’s Guide to Understanding the Rhode Island Retirement Security Act, January 2012.
Rhode Island did not respond to repeated requests to review this analysis.