The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
West 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.
During the 2015 Legislative session, legislation passed creating a second tier of retirement benefits for those hired on or after July 1, 2015 (Tier II). West Virginia's pension plan is commended for utilizing a constant benefit multiplier of 2 percent. To qualify for unreduced pensions, vested Tier II teachers may retire at age 62. Teachers who separate service before reaching retirement eligibility can defer their benefits and collect from age 64 if they have at least 10 years of service and from age 63 if they have at least 20 years of service. Early retirement with reduced benefits is available to all teachers with at least 30 years of service at age 55, at least 20 years of service at age 57, and at least 10 years of service at age 60.
Not only are teachers being paid benefits by the state 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.
The West Virginia Consolidated Public Retirement Board. Teachers' Retirement System Tier II, June 2015.
End retirement eligibility based on years of service.
West Virginia should change its rule which allows teachers defer until age 64 with at least 10 years of service and age 63 with at least 20 years of service. 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.
West Virginia allows all teachers to retire before conventional retirement age without reduced benefits. 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).
West Virginia did not respond to repeated requests to review this analysis.