Retirement Plan for Teachers Legislation
For information on these changes, and for answers as to how they might affect teachers, Webedportal turned to Jim Bishopp, author of “A Lesson Plan in Retirement: A Guide to Retirement for Teachers, Professors, and State Retirement Participants” for some answers.
Webedportal: Will a state employee’s contribution amount be changed, and if so, what is the impact?
Bishopp: ASRS just announced that employee contribution rates will increase to 11.39%, whereas just a few years ago, your contribution rate was closer to 2%.
In addition, Governor Jan Brewer signed SB 1614 into law on April 6, 2011. It mandates that employers will be paying a lesser percentage than employees are paying into the system: 47% of total cost, and employees will be required to pay 53%.
When combined with the fact that state workers have already been hit with forced days off, furloughs, pay cuts and other decreases in income, the increased contribution rate will make it even more difficult for you to invest outside of the ASRS, and effectively plan for your own retirement. It will be imperative that you be more creative with your budgeting and planning to achieve a comfortable retirement.
Webedportal: What about cost-of-living increases?
Bishopp: The recent legislation did not directly address this question. Based on legislation passed affecting other state pensions (like the Public Safety Personnel Retirement System), it appears unlikely that there will be ANY cost-of-living increase (COLA) for retirees in their benefits for several years to come.
The effect of no cost-of-living increases on your purchasing power in retirement is profound. For example, if a retiree was receiving a $3,000 per month retirement benefit from ASRS, and was granted a 2.5% COLA each year for 10 years, your benefit would increase to over $4,300 per month.
Completing a financial plan prior to retirement is now more important than ever. With no COLA increase, will you have enough money to keep up with inflation during your retirement?
Interestingly, a recent study revealed that of over 1,000 teachers surveyed, only 15% had ever done any kind if retirement planning.
Webedportal: Are there changes about when you can take full retirement benefits—and at what age?
Bishopp: HB 2024 was sent to Governor Brewer on April 20, 2011 and if signed, will retain the existing retirement criteria for individuals hired before June 30, 2011. Employees in this category are eligible for retirement without a penalty with 80-point (age plus years of service equal 80), or are 62 with 10 years of service, or age 65.
For those folks hired July 1, 2011 or after, the legislation changes the requirement for full retirement to age 60 with 25 years of service, or age 55 and 30 years of service.
This means that newly hired teachers might have to work considerably longer to reach benefit/service age.
Webedportal: In the past, teachers and other ASRS members have been able to “buy back” their years of service from other employment. Will this legislation change that?
Bishopp: YES! This was addressed in yet another piece of legislation, SB 1609, which was sent to the governor for her signature on April 18, 2011. Changes in “service purchase” requirements will allow for purchase of up to only five (5) years of service from another system, and only individuals with ten (10) years or more in the ASRS would be eligible to purchase service credit.
For all state employees - this legislation will significantly limit the opportunity for people to buy the years of service, compared to the regulations in place today. As a financial planning matter, if you are now eligible to purchase services from a previous employer, I encourage you to look at that immediately.
Webedportal: Is there anything else that ASRS members should be aware of?
Bishopp: Yes. SB 1609 establishes a Defined Contribution Study Committee that will look at the feasibility and cost of moving from the current defined benefit plan to a defined contribution plan. Under Defined Benefit Plans, a participant’s retirement income is “fixed,” and is a factor of age, ending salary and years of service. In a Defined Contribution plan, the contributions are “fixed.” You contribute a percentage of your salary, the employer matches some or all of the contribution, and all of the contributions are invested. At retirement, you can begin to draw against your account in any way that you choose. Defined Contribution plans are similar to the private sector’s 401k.
Several key points are significant for teachers:
- Contribution Rate - employees will be required to contribute 11.39% of their salary to ASRS, which will significantly affect the employee’s ability to save a portion of their paycheck. You will need to save money outside of your retirement system in planning your future finances. Be creative in your budget and planning.
- Service Purchase - begin immediately to talk with ASRS about buying years of service from previous qualifying employment. If this legislation is passed, it may dramatically reduce what you are currently eligible to buy back.
- Cost-of-Living Increase - it appears unlikely that there will be ANY cost-of-living increase for retirees in their benefits for some years to come. Be sure to do a comprehensive retirement plan long before you plan to retire.
For a complete look at the legislative changes to the system, visit the ASRS website page at https://www.azasrs.gov/content/pdf/2011_legislation_summary.pdf.