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Monday, August 03, 2015

The Ghost of Tom Joad

Times continue to get tougher for PERS members, especially those within a couple of years of retirement.  First, the change to the COLA for work past October 1, 2013.  The next shoe dropped last Friday with the cut to the assumed rate.  The new rate, effective January 1, 2016 will be 7.5%.  This affects Tier 1 members, active or inactive, because it lowers the rate of return on account balances after December 31, 2015 (the 2015 crediting will be at 7.75%).  This will not matter if you retire under Full Formula and choose Option 1, but it will matter if you choose any other payout option.  Why?  Because the reduction in the assumed rate also affects the Actuarial Equivalency Factors, which are used to price your benefit.  A lower assumed rate of return means that in order to stretch your benefit out to your actuarial life expectancy, the fund is assuming that you will earn less on your investment and will have to reduce your payout accordingly.  The actuaries expect that to earn the same benefit as you would have earned on December 1, 2015 (if you were able to retire), you’ll have to work 3 months longer.  If that weren’t enough, the actuaries also are recommending an adjustment to the life expectancy factors that take into account longer life spans, on average, for most people.  This means that your money will not only earn less, but will have to last longer.  The new factors for calculating your expected benefit will not be available until late November, which means that trying to plan for retirement between December 1, 2015 (the last date upon which the existing interest rate and mortality factors will be in effect) and later, especially in the first half of 2016, just got more challenging.

If all of this makes you feel like you are seeing the leading edge of a depression, the title is intended to evoke that spirit.  There is no ghost of Tom Joad.  For PERS members, he is alive and experiencing deja vu all over again.


Unknown said...

Thanks for your clear and helpful note on the changing AEF. I was wondering what you think about the OHSU incentive for employees to retire on 12/31/2015. The incentive is $20K for a health expense account, or some variation on that.

mrfearless47 said...

This is a tricky question. The problem with December 31, 2015 is that is past the date when the new AEF and actuarial tables become effective. The last date to retire and get the current benefits - 7.75% assumed rate and current actuarial tables is December 1, 2015. You may want to talk to OHSU about whether the deal would apply if you retired on 12/1/15 rather than 12/31. Since we don't know how much the actuarial tables will change, it is difficult to cost out the value of the sacrificed benefit over the long term relative to the value of the $20K health expense account. Without knowing the full impact of the changing mortality assumptions on the tables, we already know that the 7.5% rate costs about 3 months lag time for a 60 year old. If you add in the cost of the new mortality tables, the impact of waiting an extra month the retire might be far more than the $20,000 they are offering you as a buy out.

mrfearless47 said...

Also, $20,000 in a health savings account is chicken feed compared to what health insurance costs today. That probably wouldn't last you three years, if you were lucky. I don't think the whole package is a particularly good deal unless (a) you were planning to retire in the near future anyway, and (b) you could retire on 11/30/15. Otherwise, this is financial chicanery, typical of what OHSU is famous for doing.