Retirement Plan Objectives Future benefits should be fully financed - - PowerPoint PPT Presentation

Retirement Plan Objectives

Urban Institute Program on Retirement Policy www.RetirementPolicy.org

• Future benefits should be fully financed
• The plan should provide retirement security to employees
• Benefit structure should help employers attract and retain

qualified workers

• All employees should be treated fairly

Pennsylvania State Employees’ Retirement System (SERS)

Plan feature PA value for newly hired employees Vesting 10 years of service (YOS) Percentage factor 2.0% (plus 2% bonus for each year in excess of 40, up to 10%) Years included in final average salary (FAS) Top 3 Benefit cap 100% of FAS Eligibility for normal retirement age 65/10 YOS age+YOS=92/35 YOS (65/3 if employed at age 65) Eligibility for early retirement Any age/10 YOS (actuarial reduction) Cost-of-living adjustments (COLA) Discretionary; we assume no COLA Mandatory employee contribution 6.25% Return on refunded contributions 4.0% (trustees assume 7.5% return on investments) Urban Institute Program on Retirement Policy www.RetirementPolicy.org

Annual Pension Benefit at Age 65 ($2014)

By starting age and years of service

$3,400 $5,600 $8,400 $11,400 $17,200 $25,600 $26,600 $39,500 $54,200

25 35 45 10 years 20 years 30 years 40 years

Urban Institute Program on Retirement Policy www.RetirementPolicy.org

Value of Employee Contributions and Future Benefits

For 25-year-old hires

$0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 5 10 15 20 25 30 35 40

Years of service

Lifetime Pension Benefits Value of Employee Contributions Value of Employee Contributions if Refunded

Urban Institute Program on Retirement Policy www.RetirementPolicy.org

Expected Value of Lifetime Pension Benefits Net of Employee Contributions

• $50,000

$0 $50,000 $100,000 $150,000 $200,000 $250,000 5 10 15 20 25 30 35 40 45

Years of service

Hired at age 25

Urban Institute Program on Retirement Policy www.RetirementPolicy.org

Hired at age 60 Hired at age 45 Hired at age 35

Service Years Required to Earn Any State-Financed Benefits

36 32 26 20 14 10 10 5

20 25 30 35 40 45 50 60 Starting Age

Urban Institute Program on Retirement Policy www.RetirementPolicy.org

Annual Increment to the Expected Value of Lifetime Pension Benefits Net of Employee Contributions

• $50,000

$0 $50,000 $100,000 $150,000 $200,000 5 10 15 20 25 30 35 40 45

Years of service

Hired at age 25

Urban Institute Program on Retirement Policy www.RetirementPolicy.org

Hired at age 60 Hired at age 45 Hired at age 35

Value of State-Financed Lifetime Pension Benefits

Percentage of salary that must be set aside each year to finance benefits

• 4%
• 2%

0% 2% 4% 6% 8% 10% 12% 5 10 15 20 25 30 35 40 45

Years of service

Hired at age 25

Urban Institute Program on Retirement Policy www.RetirementPolicy.org

Hired at age 60 Hired at age 45 Hired at age 35

Percentage of Employer-Financed Benefits Going to Participants with the Highest Lifetime Benefits

76% 40% 22%

Top 25% Top 10% Top 5% Starting Age

Urban Institute Program on Retirement Policy www.RetirementPolicy.org

Key Questions for Reform

Urban Institute Program on Retirement Policy www.RetirementPolicy.org

• How can competing goals by reconciled?
• Improve financing and control costs
• Maintain adequate benefits
• Attract and retain qualified workers
• How should reforms costs be distributed?
• Taxpayers
• Current employees and retirees
• New/future employees

Common reform options

Urban Institute Program on Retirement Policy www.RetirementPolicy.org

• Change rules governing traditional pensions
• Increase employee contributions
• Reduce/suspend COLAs
• Trim multiplier, bump up retirement age
• Less commonly, adjust FAS for early separators, award longevity

bonus to late retirees

• Move to cash balance or hybrid plans
• SAFE Retirement Plan