PERA members want their retirement system to be fair and equitable. So it was no surprise to PERA staff and the Board of Trustees when, in the first phase of PERAtour, 87 percent of participants agreed that retirement benefits should be aligned with career paths and contributions.
To enhance fairness and equity, the Board is looking to bring clarity to the issue of retirement salary and parity to how members earn retirement benefits. As part of its comprehensive package of recommendations to the State Legislature, the Board addresses two calculations that are inequitable in their current form and place unneeded risk on the fund.
PERA-includable salary
The Board proposes redefining PERA salary to include employee contributions to tax-advantaged Section 125 and 132 plans. These are contributions employees make to flexible spending accounts or so-called cafeteria plans to pay for expenses such as dependent care, health care premiums, health care expenses, or transportation.
Members who participate in these plans have lower salary reported to PERA and therefore make lower PERA contributions. However, as members near retirement, they often seek to maximize their highest average salary and stop participating in these plans in order to report a higher salary to PERA.
This practice creates a disparity between how much some members are paying into the PERA system while working, and how much of a benefit they receive in retirement. This has a negative impact on the funding of PERA. It also creates a disincentive for members to participate in tax-advantaged plans near the end of their working careers.
The Board’s proposal would redefine PERA salary to include all members’ full salary, inclusive of any contributions to 125 and 132 plans, beginning on January 1, 2020. The change would increase fairness, but it would also align PERA with its peers. A recent survey of 28 statewide pension systems found that PERA is the only plan that excludes these tax-advantaged contributions from the salary amounts reported for retirement benefits.
More information on the Board’s proposal to make Section 125 and 132 contributions includable in PERA salary is available from PERAtour here.
Accrual of PERA service credit
The Board also proposes redefining how service credit in PERA is earned by moving from a salary basis to a percentage of full-time employment worked.
Currently, PERA members earn one month of service credit for each month that they earn a minimum salary of 80 times the federal minimum hourly wage (80 x $7.25=$580). As a result, part-time employees who earn this minimum salary each month receive the same amount of service credit as a full-time employee. A part-time employee who becomes full time later in a career could then receive a retirement benefit equivalent to an employee who had worked full time for an entire career. This again creates a disparity between how much some members and their employers pay into the PERA system and the benefit the member will receive in retirement.
The Board’s proposal would redefine the accrual of service credit from the current salary threshold of $580 a month to a percentage of full-time employment. Under this change, a half-time employee would receive half a month of service credit, regardless of the amount of salary earned. This proposal would require employers to define the hourly requirement for full-time employment and PERA would base service accrual on a percentage of the employer’s definition. The Board’s recommendation does not modify how service credit is allocated for educators who work a contract period that is less than 12 months.
Together, these changes would mean that dollars paid in to PERA would be equitable with dollars paid out, ensuring that members’ benefits are directly correlated to the contributions they and their employers make.
More information about which parts of compensation are currently eligible to be included in PERA contributions is available here.
More information about the Board’s proposal to change both calculations is available here.
More information about the Board’s full package of recommendations is available here.
That part time idea is HORRIBLE! People working part time already make half as much as they would working full time and therefore their retirement ends up being half what it would be already. How is cutting that in half again a fair thing to do? Giving a full credit for each month worked is the only fair way to handle part time people! This all sounds good to you, but just think about it! It’s not right!