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

Retirement Plan Objectives  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 Urban Institute Program on Retirement Policy www.RetirementPolicy.org

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 $54,200 $39,500 $26,600 $25,600 $17,200 $11,400 $8,400 $5,600 $3,400 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 $600,000 Lifetime Pension Benefits $500,000 $400,000 Value of Employee Contributions $300,000 $200,000 Value of Employee Contributions if Refunded $100,000 $0 0 5 10 15 20 25 30 35 40 Years of service Urban Institute Program on Retirement Policy www.RetirementPolicy.org

Expected Value of Lifetime Pension Benefits Net of Employee Contributions Hired at age 25 $250,000 Hired at age 35 $200,000 Hired at age 45 $150,000 $100,000 Hired at age 60 $50,000 $0 0 5 10 15 20 25 30 35 40 45 -$50,000 Years of service Urban Institute Program on Retirement Policy www.RetirementPolicy.org

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 $200,000 Hired at age 25 $150,000 $100,000 Hired at age 60 Hired at age 35 $50,000 Hired at age 45 $0 0 5 10 15 20 25 30 35 40 45 -$50,000 Years of service Urban Institute Program on Retirement Policy www.RetirementPolicy.org

Value of State-Financed Lifetime Pension Benefits Percentage of salary that must be set aside each year to finance benefits 12% Hired at age 60 10% 8% Hired at age 45 Hired at age 35 Hired at age 25 6% 4% 2% 0% 0 5 10 15 20 25 30 35 40 45 -2% -4% Years of service Urban Institute Program on Retirement Policy www.RetirementPolicy.org

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  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 Urban Institute Program on Retirement Policy www.RetirementPolicy.org

Common reform options  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 Urban Institute Program on Retirement Policy www.RetirementPolicy.org