Pension Neutrality: Rhode Island

Retaining Effective Teachers Policy

Goal

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

Does not meet
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Neutrality: Rhode Island results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/RI-Pension-Neutrality-9

Analysis of Rhode Island's policies

Rhode Island'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.

Rhode Island's pension plan does not utilize a constant benefit multiplier for teachers with different years of service. Instead, the multiplier is 1.6 percent for years 1 through10, 1.8 percent for years 11 to 20, 2 percent for years 20 through 25, 2.25 percent for years 26 through 30 and 2.5 percent for years 31 through 37. After year 37, the multiplier is reduced to 2.25 percent. The maximum benefit teachers can earn is 75 percent of their final average salaries, which is earned at 38 years of service. After 38 years, teachers' total benefit multipliers will not increase; however, their benefits may still increase if their final average salaries continue to escalate.

In addition, teachers may retire before standard retirement age based on years of service without a reduction in benefits. Teachers with 29 years of service may retire at age 59, while other vested teachers with less than 29 years of service may not retire until age 65. Therefore, teachers who begin their careers at age 30 can reach 29 years of service by age 59, entitling them to six additional years of unreduced retirement benefits beyond what other teachers would receive who may not retire until age 65.

These provisions, along with the state's early retirement with reduced benefits based on years of service, may encourage effective teachers to retire earlier than they may otherwise, and they fail to treat equally those teachers who enter the system at a later age and give the same amount of service.

Citation

Recommendations for Rhode Island

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. Rhode Island should use a pension formula that treats each year of service equally. 

End retirement eligibility based on years of service.
Rhode Island should change its practice of allowing teachers with 29 years of service to retire at age 59 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.
Rhode Island allows all teachers to retire before conventional retirement age, some as young as 59. 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).

State response to our analysis

The Employees' Retirement System of Rhode Island did not respond to repeated requests to review NCTQ's analyses related to teacher pensions.

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).