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Monday, November 02, 2015

Another Brick in the Wall

With some encouragement, PERS has finally posted both an example of the impact of the actuarial changes, and the actual tables spelling out in detail the new Actuarial Equivalency Factors.  These new tables, effective 1/1/16 for all retirements taking place on or after 1/1/16 account for two new changes.  First, they account for a lowering of the assumed rate from 7.75% to 7.5% and, second, they account for an update to mortality tables that show retirees living a bit longer.  In the example used for Money Match members, the setback appears to be approximately 5 months.  That means that the benefit you receive on December 1, 2015 (if you are eligible to retire), won’t be the same again unless you continue working until May 1, 2016.  This is one of the longest setbacks in recent history.  

Many people will wonder what to do.  My answer is that if you were not planning to retire in the next six months, it probably makes no difference.  The only people directly affected by these changes are those who are literally on the cusp of retirement and were actively planning to retire within the window of December 1, 2015 and May 1, 2016.  For those eligible to retire now, but planning on going January 1, 2016, it makes considerable sense to accelerate your retirement by one month, as you will feel the greatest impact of the AEF changes the closer you are to December 1, 2015 but after.

You can find the new tables posted on the PERS web site.  Check the column on the right side for the top two items.


JC said...

I was planning on retiring at the end of the school year on July 1st, 2016, under Money Match. Looking at just the AEFs there is no problem waiting until then, but my benefit will not be much higher than if I retire now on December 1st. My concern is that the Legislature may make changes to PERS during the short session in February that could make me wish I had retired December 1st. Do you think any legislative changes are likely and what effect might they have?

mrfearless47 said...

Good question, but unlikely in an election years. I've heard no rumors of anything popping up. I've yet to see the 45 day session conclude with major initiatives passed. Usually it is used for budget fine-tuning. That said, anytime the two collective neurons that represent the Legislature decide to fire simultaneously, trouble is possible. But since all the major statewide offices, including Governor, are up for reelection, I'd be shocked if the legislature tried anything under that short timetable.

If none of that makes you reassured, then retiring on December 1, would remove you from the pool affected by prospective changes. If you can handle the loss of regular income, and health care costs are not a concern, then easing your mind might be the best choice.

Mad dog said...

I will retire with formula plus annuity. I understand that the full formula is not affected by these changes. Does that mean that only the plus annuity portion of my retirement would be affected and that the formula portion would not?

mrfearless47 said...

Mad Dog. If your benefit option is Option 1 then the formula portion of your benefit will not be affected; however the annuity portion would be affected by the changes. HOWEVER, and I cannot emphasize this strongly enough, if you choose any of the options that include a beneficiary (Option 2, 2A, 3, 3A, Annuity Certain), your benefit WILL BE affected by the changes in Actuarial Equivalency Factor, because they have to be adjusted for both your mortality and your beneficiary. This is a common misconception about Fuill Formula because so few people actually take Option 1. I hope this clarifies the question for you.

Mad dog said...

Thanks for that clarification. So if I do in fact choose option 1 the effect of this on my total retirement amount would be minimal given the annuity portion is small.

mrfearless47 said...

Option 1 formula is definitely not affected by mortality table changes since the benefit is determined by a group of factors unrelated to your age (assuming Tier 1 and age 58 or greater) - Final Average Salary, Years of Service, 1.67% x years of service unless you are Police or Fire (then 2%). Under the F+A, the multiplier is 1% for Gen Service, not certain about P&F.

Good luck.

feathers said...

I am money match as was looking to retire within 1 year. The life expectancy table pulls out my longevity by 2 years. Reviewing all past life expectancy tables... I don't see a full 24 months stretch ever before. So I fear if I work a year more... my monthly pension under 15 year certain will be about the same if just a few dollars more. Why would I work for no increase? Am I looking at this fairly clearly?

Trisha Pandit said...

Good questing, this is one the who can target this topic

mrfearless47 said...

Well, yours in ONE way of looking at things. Of course, you are failing to account for the additional income you'd earn by working a year longer, and the additional money you'd be saving from paid health care, and the additional contributions to your IAP. So it isn't exactly a break-even situation; there are still some financial emeritus to working a bit longer. But if those are not concerns to you, then you should (if possible) consider retiring as planned.


oregontrailster said...

Feathers: The PERS board is slowly lowering the assumed rate. There are reasons for this beyond our control. The investment climate hasn't supported a higher rate for several years. As a result, PERS is required to revisit this issue every two years, after leaving it untouched for over a generation(I think since 1989). Other states are lowering their assumed rates, so it isn't an area that PERS leads the nation. If it didn't have an adverse effect on the employers, PERS would probably lower it faster. Combined with a requirement to update the AEF every two years it has produced a slow downward reduction in the average monthly pension for new retirees. It has become a matter of timing for the employees. If you add in the recent Oregon Supreme Court decision about COLAs, I'm surprised that more employees aren't retiring by the end of the year. I think of pensions as "back end" money, money earned after a successful career. The trend is slowly gliding down. I think of income from employment as "front end" money. It is money that you earn and spend in nearly real time. It is holding steady. It is a question of which "end" you want. The longer you work, the more you add to the back end. The problem is, we are tending to live longer, so it has to last longer. You didn't indicate your age but there are other factors to consider. Do you plan to work after your retirement? Are you eligible for Social Security or Medicare? Do you have deferred comp? It all adds up to a number vs desire question. What do you really want?

rkgernhart said...

The PERS website shows an example for the new assumed rate and mortality table. The example compares a 59 year old with a spouse and a 55 year old with a spouse. The 59 year old shows a smaller benefit than the 55 year old with everything else being equal. Is this correct? How can a 55 year old have a larger benefit than a 59 year old if balances and years of service are the same?

mrfearless47 said...

Your observation is correct. I'm not sure how this works either. One thing to check are the posted actuarial tables. It might be that the quarter generation difference in age has an impact on mortality, since account balance doesn't directly figure into the Full Formula benefit (except in a really complex and not-useful way). We have to assume that they also have the same FAS, which isn't stated. When I have a bit of time, I'll check the AEFs posted. If I don't see the answer there, I will email PERS contacts. I suspect they have the examples reversed. The top one is really the 55 yo and the bottom the 59 year old. We'll see.

mrfearless47 said...

From PERS:

"The examples seem counter intuitive but they are correct.

Electing Option 2 is really an optional election to buy spousal income protection insurance. To maintain cost neutrality for PERS, the anticipated cost of that insurance is “paid” via the form adjustment factor which lowers the starting benefit. (A lower benefit paid for a longer period is financially equal to a higher benefit paid over a shorter period.) That adjustment factor is set based on the estimated cost of the additional spousal payments compared to estimated cost of member-only payments if Option 2 was not elected. Thinking of it in that insurance context helps explain the math. An example best illustrates this.

Say you have two retirees with spouse age equal to the retiree age, and both retirees having the same unreduced single-life monthly benefit level. One retiree is age 55 and the other is age 59. Further, say that actuarially Option 2 is expected on average to add on four years of spousal survivor “insurance” payments (sometimes it will be zero, sometimes it will be ten-plus, but the average is four). Finally, say that each retiree’s average life expectancy is age 85. With that as setup, what is the comparative “cost of insurance” for each member to potentially elect Option 2?

Age 55 retiree: Member-only single life election would get 30 expected payments; option 2 adds on 4 expected payments, which is 13% more payments (4/30) than member-only
Age 59 retiree: Member-only single life election would get 26 expected payments; option 2 adds on 4 expected payments, which is 15% more payments (4/26) than member-only

Option 2 adds on a higher percentage of expected payments to the age 59 retiree. Because of this, the relative “cost of insurance” is higher. To reflect that math, the optional form adjustment factor is lower for the age 59 retiree than the age 55 retiree. "

So, while counterintuitive, the examples are actually correct when considered in the insurance context, which is what the optional payment forms are.

Hope this helps.

bobkapono said...

I am Tier One and plan on retiring using Option 1 effective 12-1-16 or 01-01-17. If I understand things correctly, should it not make a significant difference whether I choose December 2016 or January 2016?

mrfearless47 said...

Option 1 FULL FORMULA yes, you are correct. Otherwise, it will. Since you don't have a beneficiary, you January 2017 FULL FORMULA benefit will be slightly higher by a few dollars; this is true for other methods too but in those methods actuarial changes could have an Impact. But, to be clear, there is no impact from mortality table changes for FULL FORMULA OPTION 1.