Pension Neutrality: Iowa

Analysis of Iowa's policies

Iowa's pension system is based on a benefit formula that is not neutral, meaning that each year of work does not accrue pension wealth in a uniform way until teachers reach conventional retirement age, such as that associated with Social Security.

Teachers' retirement wealth is determined by their monthly payments and the length of time they expect to receive those payments.  Monthly payments are usually calculated as final average salary multiplied by years of service multiplied by a set multiplier (such as 1.5).  Higher salary, more years of service or a greater multiplier increases monthly payments and results in greater pension wealth. Earlier retirement eligibility with unreduced benefits also increases pension wealth, because more payments will be received.

To qualify as neutral, a pension formula must utilize a constant benefit multiplier and an eligibility timetable based solely on age, rather than years of service. Basing eligibility for retirement on years of service creates unnecessary and often unfair peaks in pension wealth, while allowing unreduced retirement at a young age creates incentives to retire early. Plans that change their multipliers for various years of service do not value each year of teaching equally. Therefore, plans with a constant multiplier and that base retirement on an age in line with Social Security are likely to create the most uniform accrual of wealth.
 
Iowa's pension plan does not utilize a constant benefit multiplier. Instead, the state has a multiplier of 2 percent for the first 30 years of service and then the multiplier decreases to 1 percent for each additional year until a teacher reaches the maximum benefit of 65 percent at 35 years of service.

In addition, teachers may retire before standard retirement age based on years of service without a reduction in benefits. Teachers may retire when they qualify for the "Rule of 88," meaning their age plus years of service equal 88, and teachers with 20 years of experience may retire at age 62. While all other vested teachers may not retire until age 65. Therefore, teachers who begin their careers at age 22 can qualify for the "Rule of 88" with 33 years of service by age 55, entitling them to 10 additional years of unreduced retirement benefits beyond what other teachers would receive who may not retire until age 65. These provisions may encourage effective teachers to retire early, and they fail to treat equally those teachers who enter the system at a later age and give the same amount of service.

Citation

Iowa Public Employees' Retirement System Member Handbook http://www.ipers.org/publications/members/pdf/memberhandbook.pdf Summary of 2010-2012 IPERS changes http://www.ipers.org/publications/misc/pdf/other/brochure2010_2012lawchangesspreads.pdf

Recommendations for Iowa

Utilize a constant benefit multiplier to calculate retirement benefits for all teachers, regardless of years of service.
Each year of service should accrue equal pension wealth. Iowa should use a pension formula that treats each year of service equally. 

End retirement eligibility based on years of service.
Iowa should change its practice of allowing teachers whose age and years of service equal 88 to retire at any age and teachers with 20 years of service to retire at age 62, both with full benefits. If retirement at an earlier age is offered to some teachers, benefits should be reduced accordingly to compensate for the longer duration they will be awarded.

Align eligibility for retirement with unreduced benefits with Social Security retirement age.
Iowa allows all teachers to retire before conventional retirement age, some as young as 55. As life expectancies continue to increase, teachers may draw out of the system for many more years than they contributed. This is not compatible with a financially sustainable system (see Goal 4-H).

State response to our analysis

Iowa reiterated that IPERS formula awards a 2 percent multiplier for years one through 30, and stated that the average service years at retirement are 22 years. The state contended that this meets the criteria of uniformly increasing pension wealth with each additional year of work. It also stated that teaching a total of 35 years earns a benefit of 65 percent of salary, and that the plan sponsor has stated that the retirement system should assist in retention of the labor force.

Iowa added that the early retirement factor will be increased to encourage teachers to stay until age 65 or meet another normal retirement rule.

Last word

Iowa's retirement system does not meet the criteria of uniformly increasing pension wealth with each additional year of work, both because of its changing multiplier and its myriad points of retirement qualification. The fact that the multiplier is constant at the average number of service years at retirement does not change the fact that the multiplier decreases for teachers that stay past 30 years. This change makes their wealth accrual each year beyond 30 less than what they accrued previously. In addition, pension wealth spikes unevenly at the years teachers qualify for retirement. Iowa defines normal retirement age with unreduced benefits in three ways: any age once one qualifies for the "Rule of 88"; age 62 for those with 20 or more years of service; and age 65 for all other teachers. 

To the point about early retirement, Iowa is increasing its early retirement reduction. However, teachers that retire at "normal retirement age" as defined above, are not subject to benefit reductions even if they are below the age of 65.