The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
Virginia'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 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.
Virginia's pension plan is commended for utilizing a constant benefit multiplier of 1.0 percent; however, teachers may retire before standard retirement age based on years of service without a reduction in benefits. Teachers may retire when they qualify for the "Rule of 90," meaning their age plus years of service equal 90, while other vested teachers may not retire until Social Security retirement age (age 67 for those born after 1960). Therefore, teachers who begin their careers at age 22 can reach the "Rule of 90" with 34 years of service by age 56, entitling them to 11 additional years of unreduced retirement benefits beyond what other teachers would receive who may not retire until age 67. Not only are teachers being paid benefits by the state well before Social Security's retirement age, but these provisions also may encourage effective teachers to retire early, and they fail to treat equally those teachers who enter the system at a later age and give the same amount of service.
The defined contribution component of the hybrid plan is neutral because teachers' pension wealth increases in a uniform way.
Virginia Retirement System, Hybrid Retirement Plan Handbook for Members, October 2015.
End retirement eligibility based on years of service.
Virginia should change its practice of allowing teachers whose age and years of service equal 90 to retire early 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.
Virginia did not respond to repeated requests to review this analysis.