Comparing the Pension Benefit Structures of Tier 1 and Tier 5 at the 10-Year Mark

The good news.
 

It has been 10 years since the introduction of Tier 5 in both the Teachers’ Pension and Annuity Fund (TPAF) and the Public Employees’ Retirement System (PERS), which means that anyone who began a new position in the public employment in New Jersey in 2011 has now reached vested status Deferred Retirement in Tier 5. (Deferred Retirement means that any school employee who began in 2011 is now guaranteed a lifetime pension starting at age 65.)

The bad news.

It has been 10 years since the introduction of Tier 5 in both the Teachers’ Pension and Annuity Fund (TPAF) and the Public Employees’ Retirement System (PERS), which means the number of public employees who are now enrolled in Tier 5 is growing in a retirement system that is significantly inferior to the one that was in effect prior to 2007, when the State began chipping away at the benefit structure, and will eventually replace the plan (Tier 1) that had been in place for a very long time.   
  

The result will be a retirement system that does not meet the requirements necessary to be called adequate. It is a system that will start benefits at a later age and at lower relative amounts.

Let us outline the changes (reductions) that took place in the benefit structure between 2007 (Tier 1) and 2011 (Tier 5). Tiers 2, 3 and 4, legislated in 2007, 2008 and 2010, respectively, have increasingly larger benefit reductions than Tier 1 which remain with the employee for life. Each of those changes when aggregated with the 2011 legislation created very significant differences between the plan that was in effect before 2007 and the one that is current. 

#  The formula under Tier 1 in 2007 was years of credit (N) divided by 55 times the average of any of the highest 3 years of service, which in the formula is defined as Final Average Service (FAS). (N/55 x FAS = Annual Pension). 

The formula, under Tier 5, after four changes between 2007 and 2011, is now years of credit (N) divided by 60 times the average of the highest 5 years of service (FAS).  (N/60 X FAS= Annual Pension). If an annual salary exceeds the Social Security base, the excess contributions are deposited in the Defined Contribution Retirement Plan, which is a tax-sheltered annuity. At retirement, the tax-sheltered annuity is paid out in a manner decided by the retiring employee. 
 

#  The normal retirement age (the age at which anyone can retire regardless of years of credit) under Tier 1 is age 60. This is called a Service Retirement. 

The normal retirement age under Tier 5 is 65. 

#  The Early Retirement age under Tier 1 is 55. The number of years to qualify for an Early Retirement is 25. (This means that anyone may retire after 25 years of credit regardless of age. If someone is not 55, but has 25 or more years of service, he/she may retire at an earlier age and take a 3% annual pension penalty {reduction in annual pension} for life based on the number of  years that the retiree is shy of age 55.) 

Under Tier 5, the early retirement age is 65. The number of years to qualify for an early retirement is 30. (This means that anyone may retire after 30 years of credit regardless of age. If someone is not 65, but has 30 or more years of pension credit, he/she may retire and take a 3% annual penalty for life (reduction in pension) based on the number of years the retiree is shy of age 65. 

Early Retirement, therefore, is a major difference between Tier 1 and Tier 5. Under Tier 1, someone retiring at age 55 with 30 years of credit and a final average salary of $100,000 receives a pension of $54,545 per year. (30/55 X $100,000 = $54,545).  A Tier 5 retiree with the same years of credit and the same final average salary receives a pension of $35.000 (30/60 X $100,000 = $50,000 minus a 3% penalty of $15,000). 

# Under Tier 1, Deferred Retirements begin being paid to a retiree at age 60. 

Under Tier 5, Deferred Retirements begin being paid to a retiree at age 65. 

There were two additional changes in the 2011 law, referred generally as Chapter 78, one which affected Tier 5 enrollees, one which affected all current retirees.  

Tier 5 enrollees no longer have the possibility of receiving a Disability Retirement. This type of retirement has been replaced by a Long-Term Disability Insurance program, which will provide benefits to a long-term disabled employee to age 70. Beyond that, regular earned pension benefits will take over. (Tiers 1 to 4 disabled employees will still have access to the Disability Retirement provisions of the law.   

The most egregious change in 2011 was the suspension of the cost-of-living adjustments for all current retirees and all future retirees until the overall funding level of the retirement systems improve. While it affects future retirees of all tiers equally, Tier 5 retirees with their reduced annual pensions will receive smaller adjustments when the cost-of-living feature is restored.