Pension Flexibility: New Jersey

Analysis of New Jersey's policies

New Jersey only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan is not fully portable, does not vest until year 10, and does not provide any employer contribution for teachers who choose to withdraw their account balances when leaving the system. It also limits flexibility by restricting the ability to purchase years of service. However, the state is commended for offering a fully portable supplemental savings plan.

Teachers in New Jersey also participate in Social Security, so they must contribute to the state's defined benefit plan in addition to Social Security. Although retirement savings in addition to Social Security are good and necessary for most individuals, the state's policy results in mandated contributions to two inflexible plans, rather than permitting teachers options for their state-provided savings plans.

Vesting in a defined benefit plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Nonvested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. New Jersey's vesting at 10 years of service is very late and limits the options of teachers who leave the system prior to this point.

Many teachers will leave the system before they reach 10 years of service. Teachers in New Jersey with less than three years of service who choose to withdraw their employee contributions upon leaving only receive their own contributions. Teachers with at least three years of service receive their employee contributions plus interest. This means that those who withdraw their funds accrue fewer benefits or at least no benefits beyond what they might have earned had they simply put their contributions in basic savings accounts. Further, teachers who remain in the field of education but enter another pension plan (such as in another state) will find it difficult to purchase the time equivalent to their prior employment in the new system because they are not entitled to any employer contribution.

New Jersey limits teachers' flexibility to purchase years of service. The ability to purchase time is important because defined benefit plans' retirement eligibility and benefit payments are often tied to the number of years a teacher has worked. New Jersey's plan allows teachers to purchase time for previous teaching experience, up to 10 years. In addition, the amount of years purchased may not be used to qualify for any state or employer health benefits. While better than not allowing any purchase at all, this provision disadvantages teachers who move to New Jersey with more teaching experience. The state's plan also allows teachers to purchase up to two years of service for personal illness, and maternity leave is considered personal illness; however, teachers on maternity leave wanting to purchase more than three months must submit a doctor's note that the mother was disabled due to pregnancy. Teachers may also purchase up to three months for personal reasons. This is a disadvantage to any teacher who needs to take more than three months of a leave for paternity or maternity care, or for other personal reasons.

The state is commended for offering a fully portable supplemental savings plan known as the Supplemental Annuity Collective Trust (SACT). SACT has two plans, one made with after-tax contributions and another 403(b) plan funded with pre-tax contributions.

Citation

State of New Jersey Teachers' Pension and Annuity Fund, Member Handbook http://www.nj.gov/treasury/pensions/epbam/exhibits/handbook/tpafbook.pdf

Recommendations for New Jersey

Offer teachers a pension plan that is fully portable, flexible and fair.
New Jersey should offer teachers for their mandatory pension plan the option of either a defined contribution plan or a fully portable defined benefit plan, such as a cash balance plan. A well-structured defined benefit plan could be a suitable option among multiple plans. However, as the sole option, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in New Jersey participate in Social Security, they are required to contribute to two defined benefit-style plans.

Increase the portability of its defined benefit plan.
If New Jersey maintains its defined benefit plan, it should allow all teachers that leave the system to withdraw interest and employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience, at least one year per approved leave of absence, and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.  

Offer an employer contribution to the supplemental retirement savings plan.
While New Jersey at least offers teachers the option of a supplemental defined contribution savings plan, this option would be more meaningful if the state required employers also to contribute. 

State response to our analysis

New Jersey recognized the factual accuracy of this analysis. The state further noted that certain teachers may qualify for participation in the Defined Contribution Retirement Program (DCRP). Individuals eligible for membership in the DCRP include: employees enrolled in the Teachers' Pension and Annuity Fund (TPAF) on or after July 1, 2007, who earn salary in excess of established "maximum compensation" limits (salary in excess of the annual maximum wage for Social Security), employees otherwise eligible to enroll in TPAF on or after November 2, 2008, who do not earn the minimum annual salary for the Public Employees' Retirement System or TPAF Tier 3 enrollment ($7,700 in 2011, subject to adjustment in future years) but who earn salary of at least $5,000 annually; and employees otherwise eligible to enroll in TPAF after May 21, 2010, who do not work the minimum number of hours per week required for TPAF Tier 4 enrollment (35 hours per week for state employees or 32 hours per week for local education employees) but who earn salary of at least $5,000 annually.

Last word

The analysis covers the policy for newly hired full-time teachers, as this policy reflects the state's current policy as it moves forward. New Jersey should extend the option of its defined contribution plan to its full-time teachers.