Pension Neutrality: Oregon

Analysis of Oregon's policies

Oregon'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.

Oregon's pension plan is commended for utilizing a constant benefit multiplier of 1.5 percent within its defined benefit component; however, teachers may retire before standard retirement age based on years of service without a reduction in benefits. Teachers with 30 years of service may retire at age 58, while other vested teachers with less  than 30 years of service may not retire until age 65. Therefore, teachers who begin their careers at age 28 can reach 30 years of service by age 58, entitling them to seven 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.

The defined contribution component of the state's pension plan is neutral because teachers' pension wealth increases in a uniform way, and all teachers may start receiving benefits from their IAP accounts at age 55 regardless of years of service. A retirement age younger than Social Security age within a defined contribution component does not create the same spike in wealth as it does within a defined benefit structure because account wealth will continue to accrue evenly as teachers continue working up until retirement.

Citation

Oregon Public Employees Retirement System www.oregon.gov/PERS

Recommendations for Oregon

End retirement eligibility based on years of service.
Oregon should change its practice of allowing teachers with 30 years of service to retire at any age 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.
Oregon allows all teachers to retire before conventional retirement age, some as young as 58. 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

Oregon had no comment on this goal.