Pension Neutrality: Massachusetts

Analysis of Massachusetts's policies

Massachusetts'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.

Massachusetts's pension plan does not utilize a constant benefit multiplier and bases retirement eligibility on years of service. Teachers with 20 years of service qualify for standard retirement at any age, while teachers with 10 years of service must be 55. The multiplier is 2.5 percent for those who retire at age 65, and then it is reduced one-tenth of a percent for each year below 65 (e.g., a 2 percent multiplier at age 60). Reducing benefits for younger retirees is appropriate because they will on average receive benefits longer; however, the state should use an actuarial reduction because depending on a teacher's years of service, a one-tenth reduction in the multiplier may only have a minimal impact on benefits.

In addition, teachers with 30 or more years of experience and at least 20 years' membership in the Massachusetts Teachers Retirement System can increase their multiplier through a mechanism known as RetirementPlus. All teachers who become members of the pension system after July 1, 2001, participate in RetirementPlus, and teachers who were members prior to July 1, 2001, had the option of joining by raising their contribution rate to 11 percent. Teachers with 30 years of experience add 12 percent to their multiplier, and this RetirementPlus bonus grows at 2 percent for each additional year of service beyond 30 years, reaching a 32 percent bonus at 40 years of service. The maximum allowable pension benefit is 80 percent of one's final average salary. Therefore, teachers who begin their careers at age 22 can reach their maximum pension benefit by age 57 with 35 years of experience.

The net effect is that teachers who retire with 29 years of service at age 60 will have benefits equivalent to 58 percent of their final average salaries, while teachers who retire with 30 years of service at age 60 will have benefits equivalent to 72 percent, a substantial increase for one additional year of service. Some of 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

Massachusetts Teachers' Retirement System http://www.mass.gov/mtrs/2members/2members.htm

Recommendations for Massachusetts

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. Massachusetts should end its substantial increase in benefits for teachers with at least 30 years of service, and the state should use a pension formula that treats each year of service equally. 

End retirement eligibility based on years of service.
Massachusetts should change its practice of allowing teachers with 20 years of service to retire at any age with standard 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. The state's current policy of reducing the multiplier for each year a teacher retires before age 60 does not achieve this purpose because the reduction is a standard one-tenth rather than an  actuarially determined amount.

Align eligibility for retirement with unreduced benefits with Social Security retirement age.
Massachusetts allows all teachers to retire before conventional retirement age, some as young as 57 with maximum benefits. 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

Massachusetts had no comment on this goal.