On June 4, 2021, the PERS Board will receive Milliman (the actuary) recommendations about various economic assumptions for the 2022-2023 calendar years. Among the critical recommendations will be assumptions about salary growth, inflation, and the assumed interest rate. In reading the Milliman report (details of which are found in the PERS Board packet for the 6/4/2021 meeting), they are recommending slightly lower salary growth assumptions, slightly lower inflation assumptions, and slightly more substantial reduction in the assumed rate (ceiling at 7% with a recommendation to go down as far as 6.8%). These assumptions have no bearing on members who are already retired, or who will retire no later than December 1, 2021. But for all active and inactive members not yet retired, this portends some noticeable changes that may have an effect on benefits when retirement actually occurs.
Salary growth, inflation, the assumed interest rate, and mortality factors all combine together to produce the Actuarial Equivalency Factors PERS uses to calculate benefits for Money Match retirements in Tier 1 (not many of these left, except among inactive members), and for Full Formula and Formula + Annuity retirements in certain circumstances. Let me be clear that Full Formula retirements are not directly affected by any of these changes, provided that the member retires under Option 1. For members who select a Full Formula benefit with survivor options (e.g. 2, 2A, 3, 3A and others), the Actuarial Equivalency Factors come into play because PERS must account for "joint mortality" of the member and beneficiary. Depending on the age differences between member and beneficiary, this can lead to reductions from the formula benefit by as much as 15%, unless the beneficiary is substantially younger than the member.
Final decisions on the exact economic assumptions won't take place until the PERS Board Meeting on July 24, 2021, but consider this a head's up if you are eligible for and contemplating retirement now or in the near future. This is not a trivial consideration, and I encourage people to think carefully before making a decision one way or another. If you retire earlier than you would like, you may gain a higher benefit, but may lose that advantage from loss of salary, having to deal with health insurance earlier than expected. On the other hand, waiting may net you a higher percentage of salary based on the formula, but lose the advantage because AEF changes reduce the fraction because of your beneficiary's age. There are lots of considerations. The usual calculation involves something called "break even analysis", where you cost out each of two alternative decisions and figure out how long it will take for the two decisions to converge. This is not too different from considering when to take Social Security. I took my SS at 63. I made the decision because after considering what I would get if I waited until 65 or 70 (both options for me to get full or enhanced SSB), considering the time value of money, inflation, and potential investment returns on my SS money, I figured I would not break even by waiting until I was at least 80. For me, it made sense to go early and use the money as leverage. Others may not have that option, but the analysis is the same regardless. There are a few more variables involved in the retirement decision (including SS), but if you walk through it slowly and carefully, you can usually anticipate most of the necessary inputs to make an informed decision.
Just remember one crucial detail. If you decide to retire to avoid any of the future changes to the variables described above, you MUST have all your paperwork physically at PERS by no later than November 30, 2021 with a retirement date of December 1, 2021.
9 comments:
Once the board has adopted the new assumed rate , and experience age assumptions. Can someone here show what the percentage of lost retirement will be ?
It isn’t a simple calculation because there are so many different variables involved. Your age, beneficiary age (if you have one), optional benefit selected. The only point at which we will know with precision is when the new actuarial equivalency factors are reported to the Board in late November/early December. Until that time, the only piece we will know is whatever assumed rate the Board settles on later this month. But that will explain only 50% of any change in benefits, leaving the other 50% to changes in the other variables that are used to build the actuarial equivalency factors. If those variables didn’t change, then it would be simpler, though still not simple, to guesstimate benefit reductions. But we know that both inflation assumptions and wage growth assumptions are both forecast to be lower (despite a temporary spike in inflation), which complicates matters.
In short, everyone’s situation will be different. If you retire no later than Dec 1 2021, your benefit is locked down under current assumptions; any later and you are at the mercy of a new set of (lower) assumptions.
I had planned on retiring on July 1st 2022 , if this cuts my retirement in a large way then I'm out on December 1st this year ! The whole time I have worked in public job , a constant assault on the retirement by politics has been. So, sick of the every year reform and cuts. Working for the public is not fun, and having your retirement plans constantly being changed is just plain evil. I can see nobody of any qualification wanting to work for the public, for there is no incentive anymore.
Think of it this way. If you wait until 7/1/22, your benefit will probably be slightly higher than on 12/1/21. It won’t be as high as if nothing changed however. The calculation you’ll want to make is whether the additional income, additional health care coverage, and additional work credit make up for the reduction in estimated benefits.
My wife is two year's older than I, and she's is receiving social security now. How would the Pers calculation work when they revise the age/experience tables ( since will be under option 2 or 3 ) ?
Since the PERS AEF tables are unisex, the scaling will probably be proportional to what it is now. I’m two years older than my wife. My benefit was 92% of my Option 1 benefit when I selected Option 2. Had I elected option 3, it would have been about 94.5%. Since it is based on joint mortality, I think it is fairly symmetrical. I have never worked through the math of how mortality influences the AEF. Actuarial science is a branch of math I never studied.
Well they cut they assumed rate to 6.90 , now just waiting hear about the age factor. I wonder how much another hit I have to take.
They messed with the rate collar, and the age tables. Don'
t know what percentage of reduction will be ?
The rate collar was part of the problem, so what they did was to make the rate collar a bit more expansive to prevent the UAL from growing larger via the smoothing and collaring. I'm not sure that the "age tables" refer to those used for pricing retirement, but instead involve how the employer contribution is calculated by determining the age of members still working and entering the system. Not sure any of this will have any bearing (other than the actual rate change) on the calculation of benefits.
Just from the rate reduction, I would count on a five month setback in benefits; more if they do adjustments to mortality factors based on the changing demography.
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