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Friday, November 01, 2013

Dirty Lowdown and Bad

It has come to my attention that a variety of public agencies (school districts, in particular) are trying to scare the bejesus out of Tier 1 members by sending out incomplete or deliberately vague information about changes to PERS benefits coming on retirements taking place after December 1.  In one particularly egregious example, sent to me multiple times by PERS members from a particularly large school district in the south center of the Willamette Valley implied that bad things might happen if eligible employees missed the December 1, 2013 retirement date.  I’m going to shout this by using all caps - THE THINGS HAPPENING AFTER DECEMBER 1 HAVE ALL BEEN KNOWN FOR SOME TIME, ARE NOT NEW, ARE NOT RELATED TO ANYTHING THAT THE LEGISLATURE DID OR DIDN’T DO.  MOREOVER, WHILE THEY WILL PROBABLY HAVE A SLIGHTLY NEGATIVE IMPACT ON YOUR BENEFIT IF YOUR PLANS DON’T CHANGE, THEY ARE IN NO WAY THE IMMINENT DOOM THIS PARTICULARLY NASTY MEMO IMPLIED.

Let me clarify what is going on.  The two things that are going to change are 1) the assumed interest rate decreases from 8.0% to 7.75%.  The PERS Board chose to reduce the interest rate by ONLY 25 basis points to minimize the impact on employers, but the side effect is that Tier 1 members subject to the rate guarantee will be earning at guaranteed rate of 7.75%, a net reduction of about 3% on total earnings.  You can make up that difference by working an additional 3 or 4 months.  The second thing to happen is that the assumed rate is also reflected in the Actuarial Equivalency Factor, which is used to convert the Option 1 Lump Sum Benefit (Total Lump) sum, in a series of other kinds of payments more suitable to be paid out over time.  The idea is that regardless of what payout option you take, they need to all be actuarially equivalent taking into account the same factors.  The AEFs are revised every two years, just like the assumed rate is revisited every two years.  They are done at the same time because they interrelate in all the same calculations.  So, by lowering the assumed interest rate, taking into account changing mortality of both the PERS and general population, changing assumptions about inflation and salary growth, the AEFs are likely to change in a way that will reflect the fact that the typical PERS retiree is likely to live longer than the predictions from the last set of tables.  These mortality factors can’t change too much because humans are reaching the asymptotic plateau of mortality without major changes in the mortality and morbidity of the major killers.  Nevertheless, mortality factors have changed and, coupled with the lowered earnings assumption, make it likely that members approaching retirement age will see benefits reduced by anywhere from 1.5% to 3.5% depending on age at retirement, spouse’s age, if germane, and benefit payout choice.

The actuaries have not released the revised AEFs to the public yet, but they’ve suggested broadly that they will result in a rough 3 month setback.  This means that someone who can choose between December 1, 2013 retirement (under 8% and old mortality tables) and February 1, 2014 would receive approximately the identical benefit.  So, if you were planning to stay until February, but can retire at the end of this month, there is no financial advantage to you (aside from 3 months of additional income and 3 months of additional contributions to the IAP) to wait until February.  But if you can’t retire in December, or don’t want to retire in December, you can neutralize the impact by working roughly 3 months longer.

While the most offensive of these letters does encourage members to scour the PERS website for more information, the vagueness, the absolute failure to reveal the nature of the changes and the fact that they have been known for a fair amount of time is truly one of the most dirty, lowdown, and bad scare tactics I’ve seen in some time.  I should hardly be surprised since this school district comes from one of the most litigious region of Oregon.  That they would try to intimidate by scaring with, at best, misleading information is offensive and odious.  If I were a member of a union in that area, I might be inclined to file an unfair labor practice complaint against the school district.  The district could have been perfectly straightforward and mentioned the changes taking place without detailing exactly what impact they might have.  There is nothing you can be sued for by giving out factual information without offering any interpretation.  The actual notice simply scares workers needlessly without providing an iota of fact, just “beware of the boogeyman”.  Shame on this district.





M&S said...

I wonder what the employers' motivations are to wage a campaign to scare the "bejesus" out of Tier 1-ers, with the end result of more jumping ship on Dec 1 than would have occurred otherwise. Only one I can think of is such a saving in either not hiring new ones or hire lower cost new workers. Your thoughts on motivations? PS love that word "bejesus". I need to look up its origins and background.

mrfearless47 said...

I'm not really sure of the motivation. A school district doesn't gain much by losing employees right after the school year starts. I suppose they could save some short-term dollars but focusing on off-loading benefits for the remainder of the school year by finessing a buch of 1039 rehired. It might also be their clumsy way of attempting due diligence. I can assure you that the real beneficiary has to be the school district and that they aren't doing this with a pure heart.

mrfearless47 said...

A good satirical definition of the term bejesus can be found here: http://uncyclopedia.wikia.com/wiki/Bejesus .

the thom41 said...

This 0.25% reduction in the "guaranteed" rate only effects Tier 1 PERS employees that have NOT retired yet, correct ?
I retired two years ago under full formula plus annuity and I had nothing in the variable account, all fixed.

mrfearless47 said...

thethom41: correct. If you are already retired, the only impact you'll experience is the change to the COLA, which affects everyone retired or not. The assumed rate reduction only affects retirees who retire on or after 12/1/13.