Friday, October 13, 2017

Rattle That Lock

I’m getting lots of emails from members eligible to retire, but undecided.  The primary issue is related to whether the change to the assumed rate and the mortality tables will adversely affect members in the near term.  The short answer is that any change to the assumed rate has an impact on not-yet-retired members who plan on retiring via money match, Full Formula with beneficiaries, and Formula plus Annuity.  For inactive members eligible to retire, the answer to me is a no brainer.  Rattle the lock, break the chains and get out by December 1, 2017.  If you wait any longer you’ll lose money, plain and simple.  There is no way to recover the loss because you aren’t earning an offsetting PERS-employer based salary.  If you are working for a non-PERS employer, you have no constraints on your ability to work, so there is no incentive to stay in PERS past December 1, 2017 so long as you are eligible to retire from the Tier you were in at the time you worked for your PERS employer.  For all others, the calculus is much more complicated.  If you are still working for a PERS-covered employer, you have to consider factors such as lost earned income, health care benefits, and future growth in the IAP account, not to mention growth in your Tier 1 or Tier 2 account due to earnings or the assumed rate.  The 2018-19 Actuarial Equivalency Factors (which combine mortality factors, salary growth, inflation, and the assumed interest rate) won’t be known until the end of October or the early part of November (so I’m told).  Thus, the PERS Online Calculator will give inflated estimates of retirements past December 1.  Matt Larrabee, PERS’ Principal Actuary from Milliman, told me after the July meeting that the “setback” for members would be approximately 4 months.  To understand this, you need to appreciate the concept of a “crossover” point.  Basically, if you estimate your benefits for a December 1, 2017 retirement and then estimate your benefits for a 2018 retirement (using the new AEFs, not yet available), it will take you until April 1, 2018 to recover benefits lost from the change to the assumed interest rate.  Thus, on or after April 1, 2018 (approximately, depending on age and other factors), your benefit will the same as it was on December 1 using a different assumed rate and a different set of mortality factors.  If it were this simple, the advice would be obvious.  If you weren’t planning to retire until April 1, 2018 or later, you’d be no worse off than you would be retiring on December 1.  However, this ignores some things that really need to be considered.  1)  Are you ready to retire (a not-insignificant factor for many people)?  2) Can you afford to retire (this has a bunch of subquestions, including the healthcare question, made infinitely more complicated in the past two days by actions at the Federal level)?  3) if you continued to work, what risk does the 2018 short legislative session pose (at this point, minimal, but things can change although I doubt it)? 4) Is the reduction in overall benefit from retiring later, rather than earlier (Dec 1), offset by the additional income you’d make by continuing to work, getting healthcare benefits, and contributing further to your retirement plans?

All these questions should be filtering through your decision matrix about now.  I will have my hands on the new AEF tables as soon as they are made public.  While they are voluminous and difficult to assess globally, I will post them here so that people will be able to see their precise impact.  I can’t advise anyone what to do, and don’t do it.  I make an exception for inactives.  Just keep in mind that nothing good will come your way by waiting past December 1.  While your account may grow, the growth rate will be lower, your life will be (presumably) shorter, and the end result will probably leave you no better off than you’d be just taking what you have on December 1, 2017 and getting yourself out of the cross hairs.  As Pink Floyd said, ‘rattle that lock; break those chains’.  For the rest, the decision is complicated, and you need to think your answer through carefully; it isn’t an obvious one.

22 comments:

treehugger1 said...

Number 4 in your blog has a very important consideration. If you are not Medicare age and are planning on buying the PERS health insurance, you should know that the cost is skyrocketing! If you go to the PERS health insurance website and compare 2017 cost versus 2018 cost, you will note a very disturbing increase. The subsidies have not yet been determined for 2018, still, 2018 subsidies can't possible offset a major increase in the premiums.

Marc, can you shed any more light on what one might expect for the PHIP Non-medicare premiums? Why the massive increase? Are the subsidy contributions going to increase a similar percentage? Thoughts?

mrfearless47 said...

@treehugger1. I suspect the PHIP non-Medicare premiums were adjusted for the anticipated loss of the ACA subsidies by allowing insurers to raise their rates in anticipation, coupled with the Legislatively passed provider tax. I would expect that if the ACA subsidies resume, rates will decline, but I'm not sure of the impact on the referendum on the provider tax in January. At this point, I know nothing else about the PHIP non-Medicare premiums.

Worried said...

Just to clarify, the changes already made will have no impact on non-retired members planning to retire under Option 1, Refund Annuity, Full Formula? Thank you!

mrfearless47 said...

@worried. Full Formula Option 1 (refund annuity) is based only on years of service, the service multiplier, and Final Average Salary. No other calculations come into play to determine the benefit.

Worried said...

I have another question. When PERS calculates the monthly benefit, does any part of the formula count more than the other? For example, are the last three years of earnings given more weight than the total length of service? I ask because I just had 2 unusually high earning years at OHSU due to a large amount of overtime pay, but the hospital has implemented a cost containment plan that seems will be strictly enforced for the foreseeable future. My earnings this year will be at least $10K less than either of the last two years. My concern is that if I continue to work, and 2015 drops from the calculation, my monthly benefit will be lower, unless my added service makes up for it. The across the board 2.5% pay increase next July will not be enough to affect the annual earning. (I’m Tier 1, 34+ years, age 61.)
Thank you for educating all of us!

mrfearless47 said...

Each number is what it is. When each is computed, they are multipled together and the benefit pops out the other end. They are equally weighted. Years of service and FAS each weigh more than the service multiplier because that number is a constant for any member, while the others vary according to your personal circumstances. FAS is calculated according to a fixed set of rules and credited service years are calculated from the time you were a me,ber of PERS plus any service credit purchases you ate eligible for (e.g. waiting time at the front end).

Hope this helps.

Margie said...

Marc, I am starting to panic a little. Posted this at the end of a post on the POD and no one responded so I thought I would place it here. I said:

As I get closer to retirement, I am getting more nervous with my decision and am not thinking clearly at all when I read these posts. Due to an incentive at OHSU I am retiring on March 1st 2018. Nothing is written in stone, yet, but was planning option 2. Am I correct that all I am looking at is a 4 month setback? Or in addition, will there also be another factor (my husband is 4 years younger than I am) that will further decrease by monthly benefit.
Thanks for any info to clear up the mud in my head!

Also, when PERS looks at the age difference is it just a simple look at years (His birthday is 1963 and mine is 1959). The incentive requires I retire on February 28th which just happens to be my birthday. So looking at the actuarial equivalency factors we will go from .885 to .880. Am I correct in saying that will lower my benefit slightly?

Everything seemed so clear to me months ago and now...well...it is getting so close.
Thank you for your time!




Worried said...

Thank you, I’m sure this helps others as well!

mrfearless47 said...

The 4 month setback is the “all things being equal” position. What this means is that if all things are the same as they would be on December 1, 2017, they should be roughly the same on April 1, 2018. The benefit will be slightly lower on March 1. The age difference is based on birth years. There are no hidden “gotchas” that I’m aware of, but until the AEFS come out soon (i hope) there is no way I can offer much more certainty.

Anonymous said...

Re: Margie Mitchell's comment "the actuarial equivalency factors we will go from .885 to .880"--where is this info found? Would a person without a math degree understand how it affects them?

Re: your answer to Worried's comment mentioned the FAS. I read somewhere that the FAS was based on the highest three years' earnings, and somewhere else that it was based on the last three years' earnings. Please, which is correct? Thank you in advance!

Stinek said...

Re: Margie Mitchell's comment "the actuarial equivalency factors we will go from .885 to .880"--where is this info found? Would a person without a math degree understand how it affects them?

Re: your answer to my comment mentioned the FAS. I read somewhere that the FAS was based on the highest three years' earnings, and somewhere else that it was based on the last three years' earnings. Please, which is correct? Thank you in advance!

mrfearless47 said...

The numbers come from the actuarial tables published by PERS. It is the number you multiply by the Option 1 benefit to convert it to an Option 2 benefit. Thus under the current (2016-17) tables she is teferring to the fact that the difference means going from 88.5% of the Option 1 benefit to 88% of the benefit.

As for the FAS, it will be either the highest 3 years, or the last 36 months, whichever is higher.

R2R2018 said...

My brain is on PERS over load after the craziness of the legislative session last spring and now the assumed rate and Actuarial changes... Do I understand correctly that in order to "avoid" the new rate and Actuarial changes, I must retire before 1/1/18 (so by 12/1/17)?

I am tier 2 w/just over 20 years of service. I planned to retire on 2/1/18 with option 2A. It seems that it may now be better to retire 12/1/17 because waiting until 2/1/18 will actually give me a lower monthly benefit due to the new lower assumed growth rate & AE factors.

I won't be full retirement age (60) until January so my first possible "full retirement" date would be 2/1/18. Will the reduction in benefit for "early retirement" in Dec be less than what the reduction would be if I waited until Feb with the new factors in play?

Of course the PERS benefit estimate is useless at this point because I need to make a decision as to when to give my employer ample notice and get my paperwork in before PERS has the new factors available.

Thanks so much for all of your very helpful info

Nancy Kemp said...

I found a nasty surprise tonight at the PERS site. I had planned to purchase forfeited service credits at retirement. December 1st is the last chance for that, so if one doesn't hurry and retire, they completely lose the option.

http://www.oregon.gov/pers/Pages/Loss-of-Membership-Tier-One-Tier-Two.aspx

Nancy Kemp said...

December 1st is the last retirement date that allows an individual to repurchase previously forfeited service credits. Missing this deadline would lower my PERS benefit 50%.

http://www.oregon.gov/pers/Pages/Loss-of-Membership-Tier-One-Tier-Two.aspx

mrfearless47 said...

@R2R2018. The only way to confidently answer your question would be to have access to the 2018-2019 Actuarial Equivalency Tables, which are not yet available. The penalty for retiring early - in your case 2 months early - would be 2/12ths of 7.5% or roughly 1.2%. The reduction to the assumed rate is only 0.3%. If you waited to retire until 4/1 you would be at approximately the same benefit level as you would have been on 12/1/2017 assuming full eligibility to retire. I would encourage you to study the new AEFs carefully before making a decision. In your specific case, waiting might be a better option. Of course, if you need to purchase forfeited time, the dynamics change dramatically after 12/1 (see the posts around yours).

Margie said...

Marc, in your last post you said "the reduction to the assumed rate is only 0.3%.

Does that come from the change in assumed rate? 7.5 - 7.2 = .3%

mrfearless47 said...

Yes.

retire me said...

Do you have a recommendation for buying back seasonal time? We were told once in a seminar years ago to never pay more than 9 years worth of money to break even..Example if you gain $3600 year not to pay more than $32,400. What are you thoughts and logic on this?

mrfearless47 said...

@retire me. I have no experience with seasonal time. I’ve never run through any scenarios that considered it. I’m afraid, therefore, that I have no opinion either. I would imagine the answer depends on your age, your health, your beneficiary’s age and health. Nine years is a long time just to break even. You also have to consider what other uses you might put that same 9 years’ prepayment to, and what kind of ROI you’d get.

Unknown said...

I am 55 Tier 1,inactive and working in private sector. according to your 10-13 post I should have retired 12-1-17 because I will lose money. PErs tells me I will receive 1800 dollars. A month under money match no beneficiaries and only a 1000 under full formula. I thought the longer I kept my money in pers the higher the pay out. so how will I lose money not retiring in December? Thanks. Really like your blog

mrfearless47 said...

@Vicky Guay. Sorry for the delay in answering. While it is true that you will continue to earn money and your account balance will grow, the change in actuarial factors means that you could be receiving less money because after 12/1/18 the projected growth of your benefit as well as your actuarial life expectancy will be shorter. Thus, if you check your MM benefit on, say, 2/1/18, it will be lower than your 12/1/17 benefit would have been because the earlier date would have assumed a growth of 7.5% for the life of your retirement, while the later date would assume only 7.2% over your remaining life. At your age, it would take between 4 and 6 months to get back to your benefit at 12/1/17, the benefit would grow more slowly thereafter, and the linger you wait, the shorter the time you will be receiving benefits assuming you live out to your actuarial lfe expectancy. So, while your benefit will probably catch back up to where it would have been on 12/1/17, and continue to grow, it won’t grow as quickly and you will probably receive less total income over your life expectancy when you do draw it. Also keep in mind that every legislure that has targeted PERS has had at keast one bill trying to reduce benefit accruals for inactive members. One of these days, one of these bills will pass. Then you have to ask WHO REPRESENTS INACTIVE PERS MEMBERS IN LEGAL PROCEEDINGS? Actives and retirees are always represented, but who speaks for those no longer in the PERS workforce, and not retired from it?