Below we have provided a few model plans that we believe would provide generous retirement benefits to public employees without putting undue burden on our state and local governments. Our belief that pensions should be supported by contributions that were made during employment and that the burden of these contributions should be equally shared by both the employer and employee are the guiding principles behind these plans. These plans also reflect our conviction that in hard financial times, sacrifices need to be made by retirees as well as employers and employees. We also assert that when plans like these are adopted, the changes should apply to everyone, not just new hires. Applying such changes only to new hires pushes the positive effects very far into the future.
The general employee plan would consist of two parts: a defined contribution and a defined benefit component. All employees would participate in both pieces. The plan's main features are below.
Defined Contribution
Years to Vest: 3 years
Employee contribution: 3%
Employer contribution: 2%
Defined Benefit
Years to Vest: 10 years
Employee contribution: 4%
Employer contribution: 5%
Accrual rate: 0.90% at vestment and increases 0.02% each year, capped at 1.50%
Final Average Compensation: Average of last ten years' wages regular salary
Retirement eligibility: 65 years of age
Inflation adjustment: 1%
Unlike traditional defined benefit plans, contributions would remain at 4% and 5% for both employees and employers respectively, except in the event that the plan becomes drastically underfunded. In such a circumstance, certain safety net features would be put into effect. If the plan became more than 20% underfunded, employer and employee contributions would increase by 2.5% and there no longer would be inflation adjustments. If the plan became 30% underfunded, retirees would be taxed 5% on their pensions in addition to the other changes. The revenues from this tax would be earmarked for the pension fund. These measures would remain in place until the plan once again became fully funded.
Keeping contributions at set levels prevents contributions from rapidly increasing for the employer, and the plan is designed in such a way that, with reasonably modest returns on investments, a total 9% contribution would provide sufficient funds for the promised pension. In times when the set level is not sufficient, the safety net features would keep the burden shared between employers, employees, and retirees.
For the purpose of calculating pensions only regular wages would be included in final average compensation in order to prevent pension spiking, and keeping the retirement age at 65 ensures that pensions adequately reflect the investment made during employment. No early retirement benefit is allowed. If an employee retires at 60 they need to wait to 65 to collect their benefits.
Defined Contribution
Vesting: 3 years
Employee contribution: 3%
Employer contribution: 2%
Defined Benefit
Vesting: 10 years
Employee contribution: 6%
Employer contribution: 7.5%
Accrual rate: 1.50%
Final Average Compensation: Average of last ten years' wages regular salary
Retirement eligibility: 65 years of age
Inflation adjustment: 1%
The plan for public safety employees would work exactly like the plan for general employees with both the defined benefit and defined contribution elements. The only difference is that it would allow for early retirement at age 55 with a reduced benefit or deferred payment. Like the general plan, full benefits would be given at age 65, but for each year before 65 the employee retires, their pension benefit would be reduced by 5%. If an employee were to retire at age 64 his or her accrued benefit would be reduced 5%, if he or she retired at age 63 it would be reduced 10%, etc. For example, a public safety employee who retired at age 55 with 30 years of service and a final average salary of $80,000 would receive a pension of $18,000 (30 x 1.5% x $80,000 x 50%). Or the employee could choose to retire early (minimum age 55), but not receive his or or pension payments until age 65, and at that age begin receiving whatever their full accrued benefit was at 55.
Early Retirement Reduction
See some examples of current pensions plans that are expensive or in trouble and how we think they could be improved by using a plan more similar to our proposal.