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Tuesday, October 17, 2006

Seen it All Before

My sources at PERS remind me that I've "seen it all before". I posed this question to them earlier this year, as they remind me, and they claim to have settled the matter of my question in the last post. They report that the method that will be use to adjust benefits after year 1 of the Strunk Eugene plan, follows the description I give in method number 2. This means that your year 1 "net gross" benefit (adjusted minus actuarial recovery amount) becomes the new base for the COLA in the next year. This is the entire assumption of the actuarial recovery tables used to construct my program. See "Gimme Some Truth" for more details about the differences in methodology.

The more I think about this and discuss it with mathematicians, business people, and engineers, the more I'm thinking there may be a difference of interpretation between the approached intended by the actuaries in using these actuarial recovery factors, and PERS' implementation of the recovery mechanism for producing the monthly benefit check. In the main, my question lies with Option 2 -- the mechanism that PERS has multiply told me is the way they plan to apply the reductions. What still isn't clear in PERS' answer, and what makes a really big difference is how the benefit is figured beyond the first year. We all agree that the first year benefit is computed as: take the revised benefit with all COLAS and subtract some amount representing the proper actuarial recovery factor for your retirement option and your single (Option 1) life expectancy. From this, we come up with the net gross benefit - an amount that has de facto been subjected to the actuarial recovery factors. From this point further, there is no actuarial reduction remaining as the benefit has been reduced by the flat amount in perpetuity. It should be this simple. Future COLAS should be applied to the "net gross benefit" starting after year 1 and should continue to grow without further reduction thereafter. If this is what PERS is planning to do, they should acknowledge it. Perhaps I haven't been clear enough in formulating my question, but I understand the ramifications much more clearly now than I did when I first asked the questions. Watch this space for a more definitive answer.

Speaking of programs, I released version 1.0PR (release candidate 1) for Windows and OS X early this afternoon. You can visit the link over on the left, which will take you to the web page where the program links can be found. Please do read the instructions. They will save you (and me) a lot of time later.

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