THE CONNECTICUT ALTERNATE RETIREMENT PROGRAM CRISIS
Connecticut Committee for Equity in Retirement
Equal Retirement for Equal Work
The Connecticut Committee for Equity in Retirement (CCER) was formed in 2008. It advocated a reform that would allow members of the State of Connecticut's Alternate Retirement Program (ARP) to transfer to the State Employees Retirement System (SERS). ARP members contribute more than twice as much as SERS members yet receive less than half the benefits. At the same time, the State of Connecticut must contribute more for ARP than SERS. Adoption of the reform would save the state money and ensure retirement security for current ARP members.
E-mail Distribution List for the CCER Update: To join, send an e-mail to RussellJ@easternct.edu. Back issues.
Social Security Distribution List (of interest primarily to ARP members who began before 1990 and do not have Social Security coverage): To join, send an e-mail to Siporinr@mail.ccsu.edu
The campaign initiated by CCER achieved success on September 22, 2010 when Roberta Golick, Arbiter of a Grievance filed by the State Employee Bargaining Agent Coalition on behalf of ARP members, decreed that “between the date of this award and December 31, 2010 all ARP members shall be given the one time opportunity to make their irrevocable choice to either remain in ARP or transfer to SERS.”
Fulfillment of the grievance remedy, however, has been delayed. In January 2011, the State of Connecticut Retirement Commission announced that, following the recommendation of the corporate law firm of Robinson & Cole, it was seeking prior authorization from the Internal Revenue Service, a process that could delay fulfilling the grievance ruling for up to two years or longer.
In response to the suspicious delay, SEBAC negotiated creation of a new Hybrid Retirement Plan in a Concessions Agreement with state employees in August 2011. Members of ARP will be allowed to transfer to that plan while the original grievance award continues to be pending.
There are thus two solutions to the ARP crisis for state employees: to transfer to the Hybrid Plan, which should be available by May 2012, or to wait for the original Grievance Award to be approved.
Chart. Grievance Award and Hybrid Plan Transfer to SERS Opportunities
Grievance Award Hybrid Plan
Type of Plan Defined Benefit Defined Benefit
Pension Benefit SERS Tier II/IIA* SERS Tier II/IIA*
Employee Contribution 0 – 2% of salary* 3 – 5% of salary*
Cost to Purchase Service Credits Higher for most** Lower for most**
(credit for time employed)
Cash Out Provision No Yes
Beginning of Transfers Unknown May 2012***
* With the Grievance Award, transferees would be placed in SERS Tier II or IIA, depending on when they were first employed before or after July 1997. The pension benefits of II and IIA are identical. The employee cost, however, is different: 0% of salary for II and 2% for IIA. The Hybrid Plan is a new plan within SERS with identical pension benefits to Tiers II/IIA. The employee cost is 3% of salary if first employed before July 1997 and 5% if first employed after then.
**The cost of service credits (credit for time employed) rises steadily up to age 62 and then begins to decline for both plans. Up to age 60, the cost for Hybrid Plan service credits is significantly lower than for SAG Award credits. After age 60, the costs of service credits for both plans are almost equivalent.
*** The opportunity to transfer to the Hybrid Plan will remain open until 90 days after the Grievance Award IRS issue is resolved
For those who have retired or who are close to retiring, there is no significant difference between the two options. Those who have a number of years to go before retiring, though, would be paying a relatively higher cost for participation in the Hybrid Plan. That higher cost would be the same that they are now paying for participation in ARP. It is unknown whether those who transfer to SERS via the Hybrid Plan would be allowed to later transfer to Tiers II or IIA of SERS once the Grievance Award IRS issue is resolved.
The state’s Retirement Services Division has established two websites with information for the Grievance Award and the Hybrid Plan transfer opportunities. Those sites contain considerable information about the different plans and online calculators for estimating the costs of transferring.
Arbitor's Award that Allows Transfer from ARP to SERS
Resources for the Transfer Opportunity
Five Key Myths about ARP and SERS
The ARP Crisis and How to Resolve It - Committe for Equity in Retirement presentation at the State of Connecticut Comptroller's Office, September 16, 2009.
How Much Would It Cost to Buy Into SERS? Online Calculator
How the State and Taxpayers Would Benefit from Allowing ARP Members to Transfer to SERS
Income Solutions - A First Evaluation
Comparing SERS and ARP Retirement Benefits
Comparing SERS and ARP Retirement Benefits - II
Comparing SERS and ARP Disability Benefits
How ARP Discriminates Against Women
How to Quickly Calculate ARP versus SERS Retirement Incomes
How Much Do You Need to Accumulate in ARP? (worksheet)
ARP and Social Security Benefits
ARP, the Market, and Annuity Rates
Steering Grievance - Text of October 13, 2009 SEBAC grievance on steering into ARP
Frequently Asked Questions
1. Links to Videos and Radio Programs
"The Retirement Crisis in the United States." Interview with CCER co-chairperson James W. Russell on KPFA-FM (Berkeley), November 2, 2010.
"No Crisis in Public Retirement Systems: Debunking the Hype and Attacks." On February 26, 2010, the Progressive States Network sponsored a “webinar” titled “No Crisis in Public Retirement Systems: Debunking the Hype and Attacks.” Its purpose was to counter a national campaign that aims to end defined-benefit public pensions for new state employees and replace them with ARP-like 401(k)s. What we are seeing in Connecticut is a part of that campaign. To listen to a recording (a little over an hour) of the webinar, click here.
The Great Retirement Rip-off (TalkNation, syndicated through Pacifica Radio Network, with Dori Smith)--60 minutes. Radio interview with Connecticut Committee for Equity in Retirement co-chairperson James W. Russell.
Sixty Minutes (CBS) segment on the 401(k) crisis—15 minutes. If you are in a hurry and only have time for a quick background on the issues, see this excellent report. Especially good in documenting how the administrators of 401(k)s charge exorbitant hidden commissions and administration fees that drain off substantial funds. The Alternate Retirement Program (ARP) is essentially a 401(k) specially designed for state employees. The official reason for changing administration of ARP from TIAA-CREF to ING was to reduce and make more transparent these charges. See the following explanation.
Interview with Teresa Ghilarducci (Democracy Now with Amy Goodman)—15 minutes. Teresa Ghilarducci is a leading expert on retirement and critic of the 401(k) approach.
Can You Afford to Retire? (PBS—Frontline)—60 minutes. Originally broadcast in 2006, this prophetic program offers a comprehensive report on why the 401(k) approach to retirement has failed.
2. Links to Articles and Reports
“A Better Bang for the Buck: The Economic Efficiencies of Defined Benefit Pension Plans.” Research study from the National Institute on Retirement Security. Essential reading for understanding why defined-benefit plans, such as SERS, are less expensive for employers than defined-contribution plans, such as ARP—an explanation that refutes the widely held view to the contrary. "Worries about retirement security abound. Families fear that they won’t have enough to support an adequate retirement income as home values and financial markets plummet. Dwindling profit margins have employers looking to cut costs. And governments are concerned about delivering on the promises that they have made to their citizens and to their employees as tax revenues shrink amid a weakening economy. In this environment, some have proposed replacing traditional defined benefit (DB) pensions with 401(k)-type defined contribution (DC) retirement savings plans in an effort to save money.
But decision-makers would be wise to look before they leap. To deliver the same level of retirement benefits, a DB plan can do the job at almost half the cost of a DC plan. Hence, DB plans should remain an integral part of retirement income security in an increasingly uncertain world because they offer employers and employees the best bang for the buck." To read the entire 19 page report, click here
“Retirement Security: A Lesson from West Virginia,” The Public Employee Advocate (American Federation of Teachers), December 2009/January 2010. Report on the experience of West Virginia, which allowed members of its ARP-like defined contribution retirement plan to change into its SERS-like defined benefit plan.
Gandel, Stephen, "Why It's Time to Retire the 401(k), Time, October 7, 2009. Good revelation of the failure of 401(k)s to match traditional pensions for retirement income security. Discusses several possible solutions.
Mark Olleman, “Public Plan DB/DC Choices,” Periscope, January 2009. Indicates that Ohio may provide a model for ARP reform in Connecticut. According to the article, "starting Jan. 1, 2003, the Ohio Public Employees Retirement System allowed new employees to choose between an all-DB plan (the Traditional Pension Plan), an all-DC plan (the Member-Directed Plan), and the Combined Plan. In the Combined Plan, employer contributions fund DB benefits and all member contributions are credited to DC accounts. Members have three chances to change their minds about their choice—once in the first five years after hire, once five to 10 years after hire, and once at any time after 10 years from hire and before retirement. Changes are prospective only, but members transferring to the all-DB or combined plan have the option to purchase service in the new plan using their DC accounts. Service purchases are based on service in the plan the member is opting out of; must use the DC account first; and if the DC account is less than the total cost, then the member may still purchase all service with an additional lump sum, rollover, or payroll deduction." However, Ohio also as an ARP-like retirement system as well out of which participants cannot transfer as is presently the case in Connecticut.
Jason Milman, "$1B Pension Flap May Be Sent To Court," Hartford Business Journal, August 8, 2008. Article indicates that when the State changed management of ARP from TIAA-CREF to ING in 2005, it wanted to allow ING to sweep into its control all TIAA-CREF past accumulations of participants rather than leave the decisions up to the individual participants as it has been so far.
Catherine Rampell and Matthew Saltmarsh, "A Reluctance to Retire Means Fewer Openings" (New York Times, September 2, 2009). Useful comparison of 401(k) retirement crisis in the U.S. with lack of crisis in Europe because of continuance of traditional pensions there.
James Ridgeway, “Who Shredded Our Safety Net? (Mother Jones, May/June 2009). Good investigative reporting that includes the author’s experiences with his own 401(k) account being insufficient to allow him to retire at all despite being over 70.
“Your Retirement: No 401(k) Do Over for You” (Money, October 17, 2008 by Janice Revell). Report on West Virginia teachers being allowed to switch back into the state’s defined benefit pension after their 401(k) type retirement program failed to provide adequate income for retirement.
“Tinfoil Handshake for ARP Retirees.” Documentation of the gross inequity for ARP retirees compared to SERS and TRS retirees of the 2009 Retirement Incentive Program negotiated between the State and SEBAC.
“The State of Connecticut Alternate Retirement Program: Crisis for Retirees and a Reform Proposal.” Address by James W. Russell to first meeting sponsored by the Committee for Equity in Retirement at Eastern Connecticut State University, December 2, 2008. Explains differences between the State of Connecticut retirement programs and why the Alternate Retirement Program (ARP) is in a crisis for retirees. Includes extensive documentation and a glossary.
Robert Reich, "The Truth Behind the Social Security and Medicare Alarm Bells." Reich, former Secretary of Labor during the Clinton Administration and trustee of the Social Security System, exposes the myth that Social Security is in crisis.
"The Netherlands to Provide $13 Billion to the ING Group," New York Times, October 20, 2008. Article announcing the Dutch bailout of ING.
"ING Seeks Some 2008 Employee Bonuses Back, Chief Says," New York Times, March 23, 2009. Indicates that, as with AIG, top managers in ING routinely reward themselves with substantial bonuses--some $410 million--in 2008.
3. Links to Organizations
Pension Rights Center. Advocacy center for pension members. Site has good information.
Center for Retirement Research, Boston College. Excellent research center with on line access to its reports.
Retirement USA. Advocacy organization formed in 2009 in response to the retirement crisis, includes former Connecticut Congressperson Barbara Kennelly
National Committee to Preserve Social Security and Medicare
National Institute on Retirement Security. Excellent online resources
Progressive States Network. Policy organization that focuses on state issues.
4. Links to State of Connecticut Retirement Programs
State Employee Retirement System (SERS): Tier I, Tier II, Tier IIA . State of Connecticut sites that describe the different SERS programs and their pension benefits.
Teachers Retirement System (TRS) State of Connecticut site that describes the Teachers Retirement System and its pension benefit.
Alternate Retirement Program (ARP) State of Connecticut site that describes the Alternate Retirement Program.
FREQUENTLY ASKED QUESTIONS
What is the Connecticut Committee for Equity in Retirement?
How many members does ARP have in Connecticut?
What retirement reforms does the Connecticut Committee for Equity in Retirement advocate?
How much would it cost to purchase a year of credit in SERS?
Wouldn’t the state lose a lot of money if it allowed ARP members into its pension fund?
Would it be possible to devise a buy-in plan that was fiscally beneficial to both the state and ARP members?
I’ve heard that the state’s pension fund is underfunded and going broke, so wouldn’t it be a bad idea to get into it?
What is the difference between 401(k) and 414(h) plans?
Did faculty members lobby for the creation of the Alternate Retirement Program and, if so, doesn’t that undermine the
argument that they should be able to change plans now?
Isn’t the steep fall in value of our ARP portfolios just a temporary problem that will be resolved once the
stock market recovers?
How can I get involved?
Why did the State of Connecticut change the administrator of ARP from TIAA-CREF to ING?
1. What is the Connecticut Committee for Equity in Retirement?
In December 2008 Alternate Retirement Program (ARP) members at Eastern Connecticut State University in December 2008, realizing that ARP retirement benefits, dramatically lower than those of SERS members, are inadequate for providing sufficient retirement income, began a Committee for Equity in Retirement. The committee expanded rapidly to other higher education institutions in the state and in October 2009 became a statewide organization--the Connecticut Committee for Equity in Retirement. It seeks to reform ARP to provide adequate retirement income (see question 3) and to facilitate similar organizations on other Connecticut campuses where faculty and administrative employees belong to ARP.
2. How many members does ARP have in Connecticut?
We believe that approximately 8,500 out of 55,000 Connecticut state employees belong to ARP. The others belong to either the State Retirement System (SERS) or the Teachers Retirement System (TRS). The great majority of ARP members are faculty or administrative employees at the Connecticut State University, the University of Connecticut, or the four community colleges. At Eastern Connecticut State University, 87.2 percent of faculty and 75 percent of administrative employees are in ARP.
3. What retirement reforms does the Committee for Equity in Retirement advocate?
We advocate that ARP members be allowed, if they wish, to roll over some of their accumulations into SERS to purchase years of credit. We also advocate that SERS sell annuities containing cost-of-living adjustments directly to retiring and retired state workers.
4. How much would it cost to purchase a year of credit in SERS?
In other states that permit purchase of service credits, there are different formulas for determining their cost. The fairest formula, we believe, would be one in which ARP members paid 8 percent of their salaries—what the state contributed to ARP—plus 5 percent compounded interest for each year of service purchased. An actual formula would have to be determined through negotiation. The most likely formula since it would be revenue neutral for the state will be one based on the actuarial value of the resulting pension. In May 2010 higher education unions commissioned an actuarial study from Cavanaugh Macdonald that determined costs based on that approach. To see the results of the study with a discussion, click here.
5. Wouldn’t the state lose a lot of money if it allowed ARP members into its pension fund?
No. It is possible for the state to break even or profit depending upon how the buy in cost is actuarially determined.
6. Would it be possible to devise a buy-in plan that was fiscally beneficial to both the state and ARP members?
Yes. The buy-ins would bring an infusion of needed cash to the pension funds. Because the state does not have to charge high commissions and administration fees, it can manage those funds at substantially lower costs than can private firms. Those lower costs allow it to offer more generous retirement incomes. In other words, the gains from the state’s substantially lower costs can be divided between it and retirees. In sum, by purchasing service credits we can help sure up the State Employees Retirement System while at the same time insuring retirement security for ourselves, creating a win-win situation for both the state pension fund and ourselves.
7. I’ve heard that the state’s pension fund is underfunded and going broke, so wouldn’t it be a bad idea to get into it?
No. Many state pension funds are underfunded, but that does not mean that they are going bankrupt. In fact, no state pension fund in the history of the United States has ever failed to meet its obligations to retirees. A number of private pension funds, on the other hand, have failed to meet their obligations.
8. What is the difference between 401(k) and 401 (a) plans?
A 414(a) plan such as the Alternate Retirement Program (ARP) is essentially a 401(k) plan specifically designed for state employees. Both plans are named after their respective sections of the Internal Revenue Service Tax Code. Both plans allow individuals to save for retirement with pre-tax dollars whose accumulations are not taxed. Taxes are only collected when the accumulated amounts are withdrawn during retirement.
9. Did faculty members lobby for the creation of the Alternate Retirement Program and, if so, doesn’t that undermine the argument that they should be able to change plans now?
We have heard--but not yet verified--that faculty members in either the Business or Economics Department at the University of Connecticut heavily lobbied lawmakers to create the ARP in the 1970s. Even if ARP was created at he request of faculty members and with good intentions, it is not working for the vast majority of its members and therefore should be fixed. When opting for ARP, faculty and administrative employees often were not fully informed. For many years the state did not tell them that their decision was irrevocable. Many faculty members were told that SERS was not available to them. In short, the state’s notification practices were inconsistent and chaotic.
10. Isn’t the steep fall in value of our ARP portfolios just a temporary problem that will be resolved once the stock market recovers?
No. Even if and when the stock market recovers, typical ARP accumulations will only support retirement incomes that are dramatically lower than SERS will for equivalent years of service and salary levels.
11. How can I get involved?
We would like to see committees formed on all higher education campuses in Connecticut where there are ARP members. For now, the contacts are: Eastern Connecticut State University, Marcia McGowan (McGowan@easternct.edu); University of Connecticut, Michael Kurland (Michael.Kurland@uconn.edu); Stephen Adair, Central Connecticut State University (Adairs@mail.ccsu.edu); and Western Connecticut State University, John Briggs (firstname.lastname@example.org). If there is not a contact at your college or university, write to Jim Russell (RussellJ@easternct.edu) at Eastern Connecticut State University.
12. Why did the State of Connecticut change the administrator of ARP from TIAA-CREF to ING?
The official reason was that ING would have more transparent administration fees. According to Steve Greatorex, business agent for CSU-AAUP and a member of the State Retirement Commission:
“The Retirement and Benefits Division (the State) made changes to the ARP, 403(b), and 457 plans in 2005. At that time, stripped out all of the hidden fees that were imbedded in most of the investment options. Even though the TIAA-CREF annuities that were in the ARP had lower fees than many of the other options, they still had 12(b)(1) ‘marketing’ fees and ‘mortality and risk expense’ fees and ‘administration’ fees imbedded in their expenses. The 403(b) and 457 investment options had many of these expense categories as well, with higher ‘marketing’ or ‘administration’ fees to pay commissions to broker/representatives.
“By stripping out these hidden fees from the investment funds and then adding back an explicit, fully disclosed, low ‘administration’ fee, the State was able to provide transparency to participants. The State (Retirement Division) insisted that all personnel working for the plans be salaried and not receive commissions. At least now participants know what they are paying for.”
However, not all fees are disclosed.
“An additional area of expense, the expense of buying and selling securities, is imbedded in the investment management fees of the mutual funds [emphasis added]. The State tried wherever possible to provide index funds and actively managed funds in most investment categories. Participants who do not want to pay the extra expense for more active stock and bond trading can choose to invest in index mutual funds.”
INCOME SOLUTIONS—A FIRST EVALUATION
In the “CTDCP News” (Summer 2009) that comes with the ING statement, State Comptroller Nancy Wyman explained “a new option called Income Solutions.”
Income Solutions is a reaction during the spring 2009 SEBAC negotiations to our efforts to foster ARP reform. But instead of creating a state-financed non-profit annuity option, which we supported, it set up a plan to try to get better “institutional” annuity rates from private vendors. As explained by the comptroller, it “allows you to obtain an institutionally priced quote for an immediate income annuity from up to seven different insurance companies.”
A member of our committee tested the new arrangement. Her conclusion was that it was far from an adequate substitute for SERS or a state-provided non-profit annuity.
Below is a summary of her recent annuity quotes using Income Solutions.
One ARP participant’s experience comparing an annuity from Income Streams to Tier I and Tier II pensions
Annuity quotes received from Income Streams, 7/30/09
annual income as % of annuity deposit
Maximum Annual Income on $100,000 annuity
7.05% - 7.77% **
5.44% – 6.23%
4.57% - 5.40% (1st yr)
Linked to CPI *
4.96% - 5.10% (1st yr)
6.7% - 7.75%
4.97% - 5.88%
4.7% - 5.73% (1st yr)
Linked to CPI
4.5% - 4.7% (1st yr)
* COLA is Cost of Living Adjustment
* CPI is Consumer Price Index
** The ranges represent the lowest & highest quotes I got. I received quotes from 4 companies but only 2 gave quotes with CPI-linked COLAs.
Participants in SERS (State Employee Retirement System -- Tier I & Tier II) get annual COLAs that are generally 60% of the previous year’s increase in the CPI (Consumer Price Index) with a minimum COLA of 2.5% per year and a maximum of 6%. To approximate the SERS minimum, I requested quotes with 2% and 3% annual increases and averaged them. The annuity quotes with a 4% COLA approximate SERs when the CPI is 6.7%. Most economists expect that we will be experiencing much higher than normal inflation in coming years, possibly in the double digits. This is the link to the complete SERS COLA formula: Memo NO. 97-23 - SEBAC changes. Keep in mind that SERS never gives less than 2.5% even if the inflation rate is lower. Annuities with COLAs pegged to the CPI can be less than 2.5% or even negative.
Comparing an ARP annuity to Tier I and Tier II
The table below compares the actual benefits one ARP participant would receive under the various pension plans using the Retirement Benefit Estimators on the state website and the above annuity quote from Income Streams. Everyone’s experience would be different, based on age, years of service, salary, and the individual’s ARP investment returns.
Data used in this example:
Age of participant – 61
Gender – Female
Average annual salary for highest 3 years including longevity - $88,077
Years of service – 24 without Retirement Incentive Plan (RIP), 27 with RIP
Total ARP accumulation 1985-2009 - $400,000
Tier I without RIP
Tier I with RIP
Tier II without RIP
Tier II with RIP
ARP annuity with 2.5% COLA from Income Streams (5.88%)
ARP annuity – portion funded by employer (comparable to Tier II)*
ARP annuity – portion comparable to Tier IIA
* Employees contribute 5% of salary and employer contributes 8% to ARP. Therefore, 8/13 of an ARP accumulation is attributable to employer contributions. Tier II pensions are fully funded by the employer and do not require any contribution by employees. The figure in next to last column is 8/13 of an ARP annuity - the portion funded by employer - and so is comparable to Tier II. Tier IIA requires a 2% contribution by employees. The figure in the last column is 10/13 of an ARP annuity and so is comparable to Tier IIA.
As you can see, an ARP annuity funded with employer-paid contributions pays less than half of Tier II even without the RIP.
COMPARING SERS AND ARP RETIREMENT BENEFITS
All of the SERS plans—tiers I, II, and IIA—are more favorable to employees than the ARP plan in important respects: the employer contributes more and the employee less to support them; their higher retirement incomes are guaranteed whereas the lower ARP incomes are not; and the SERS pension includes a cost of liiving adjustment (COLA) that will be especially crucial during the expected inflationary period to come resulting from the costs of war and economic bailouts. ARP retirement incomes are fixed annuities that do not include COLAs.
Table 1. The Plans
Tier I Tier II Tier IIA
Employer Contribution * * * 8% salary
Employee Contribution 2% salary none 2% salary 5% salary
Retirement Income Amount Guaranteed Yes Yes Yes No
Retirement Income Includes COLA** Yes Yes Yes No
** Cost of Living Adjustment
Table 2 presents the ARP accumulations that would be necessary to match the first years of SERS pensions. We say “first years” because in succeeding years the ARP fixed annuity incomes would increasingly fall behind SERS pensions that include COLAs.
Table 2. Comparing SERS and ARP Retirement Incomes
Final Income Pension with COLA Needed ARP accumulation for equivalent annuity income with COLA
Tier I Tiers II & IIa Tier I Tier II & IIA
$70,000 $35,000 $25,925 $700,000 $518,500
$80,000 $40,000 $30,500 $800,000 $610,000
$90,000 $45,000 $35,075 $900,000 $701,500
$100,000 $50,000 $39,650 $1,000,000 $793,000
Assumptions: 25 years of state service; retirement in 2008; 5 percent annuity
How realistic is it that ARP participants can achieve these levels of accumulations before retirement? Every ARP participant’s situation is different depending on the fate of their investments. We believe, though, that the great majority of ARP participants will not come close to accumulating enough to match corresponding SERS pensions. As in gambling, some beat the house (in this case do better than they would have in SERS) but most don’t.
To cite one example, the writer of this report brought six years of TIAA-CREF accumulations into ARP and now has a total of 30 years participation. For the past eight years he has contributed an additional $13,000 a year to his retirement account. He has followed a typical investment strategy. At the height of the market in summer 2008, he had an accumulation of $620,000 that would have gotten him an income annuity of $31,000. Had he had a SERS Tier II or IIA pension for his average last three years income of $95,179 with 30 years of service, he would have received $44,933 with a COLA—45 percent more plus the COLA.
That was in the best of times. Now that stock market values have plunged, his accumulation is down to $480,000 and worth a fixed annuity of only $24,000. As this example indicates, not only do ARP participants receive less in retirement, they live the myth of Sisyphus with their accumulations susceptible to steep falls in value. To make matters even worse, they must pay more for their low and unreliable retirement plans. ARP participants must contribute 5 percent of their salaries compared to 2 percent for Tiers I and IIA and none for Tier II (See Table 3). The writer of this report had to sacrifice $13,000 of yearly income in addition.
Table 3. Comparing Costs to Participants of SERS and ARP
Retirement Income Accumulation needed Cost to Participant
Tier II $34,454 + COLA $0
Tier IIA $34,454 + COLA $29,067
ARP $34,454 + COLA $689,080 $72,667
Assumptions: 23 years state service (1986-2008); Salary range: $28,000 in 1986 to $98,378 in 2008
In conclusion, ARP is a failed retirement system in terms of what should be its primary goal: insuring adequate financial security in retirement for participants. ARP participants pay far more for far less than do SERS participants, and that is true even when the stock market is strong. The ARP crisis has as much to do with defects in its approach to retirement financial security as it does to stock market ups and downs. The SERS approach clearly works better for insuring financial security in retirement.
Determining SERS and ARP Benefits
1. SERS Benefits Formulas
Tier I is straight forward: Average of final three years salary X years of service X .02.
Tiers II and IIA are more complicated and result in lower benefits:
one and one-third percent (.0133)
average salary for last 3 years
one-half of one percent (.005)
average salary in excess of the year's breakpoint
years of credited service to a maximum of 35 years
one and five-eighths percent
years of credited service over 35 years
2. ARP benefits
Participants have the option of receiving their accumulations as lump sums. That option, however, carries severely negative tax consequences. A second option is to roll their accumulations into annuities. An annuity, purchased from a vendor, guarantees that the buyer will receive a fixed income for life. The amount of the income depends upon the size of the annuity purchased and its rate. The size of the ARP accumulation determines the possible size of the annuity. At the present time, average annuities with COLAS carry a rate of 5 percent. Thus, for example, a $ 1 million annuity X .05 = an annual income for the rest of one’s life of $50,000. Rates of interest are modified by the age of the purchaser, the older, the higher.
COMPARING SERS AND ARP RETIREMENT BENEFITS - II
Stephen Adair, Central Connecticut State University
Suppose Jane and Joe were hired in 1979 as Assistant Professors at $18,000 and retired in 2008 after 30 years of service. Assume they had identical pay histories. After their first year, they each received a 6% yearly increase before being bumped up to $30,000 in 1985 when they were promoted to Associate Professor, and then received a 5% pay increase until promotion to Full Professor in 1991, when their salary increased to $46,000. Rates of inflation and pay increases were higher in the 1980s, and so after 1991, their yearly increase was reduced to 4% until their retirement in 2008 (It would be easy enough, although time consuming, to adjust these values based on contract provisions). At retirement, they each had a salary of $97,215 (assuming no market adjustments, chair pay, summer teaching, additional grant awards, or mandatory furlough days).
Tier IIA was not offered in 1979, but to compare the retirement consequences of electing SERS vs. ARP, let’s assume that Jane elected to take the SERS Tier IIA plan under the current rules, and Joe elected the ARP. Jane would contribute 2% of her pay to the plan, and Joe would contribute 5%. Over the course of their career, Jane would pay $31,300 and Joe would pay $78,200; a difference of $47,000. Suppose Jane decided to put the 3% difference into an IRA through regular payroll deductions.
At the point of retirement, Jane would begin receiving pension payments of $43,783 in the first year (which would increase with cost of living adjustments of between 2.5% to 6.0% in subsequent years) and have a separate IRA account from the 3% saved. Jane decides to keep the IRA account as an investment or to pass along to her children (although she would need to make the minimum withdrawals as required by law).
Joe decides to keep a portion of his ARP accumulation as a retirement investment (the same amount that Jane kept in her IRA) and with the remaining amount he elected to purchase an annuity that would guarantee an income for life (with no death benefit). For each $100,000 invested in the annuity, Joe would receive $7900 per year based on current rates (Note: I received this figure from a certified financial analyst – this is a considerably more generous rate for ARP participants than the 5% figure Jim Russell used in some of his comparisons. I also made these figures to be as generous as I could for ARP recipients: no death or spousal benefit, Joe was assumed to be 65 and male. The yearly payment would be reduced if a death benefit or spousal benefits were included. If Joe was younger than 65, the yearly payment would be reduced (and increased if older). If Joe was short for Josephine, the yearly income would also be reduced because of gender differences in life expectancy).
At a stable yearly rate of return on investments of 6%, both Jane and Joe would be retiring with an IRA worth $100,034. Jane would have a yearly income of $43,783 (with a COLA), and Joe’s would be $26,342 (without a COLA).
At a stable yearly rate of return on investments of 8%, both Jane and Joe would be retiring with an IRA worth $134,044. Jane would have a yearly income of $43,783 (with a COLA), and Joe’s would be $35,299 (without a COLA).
At a stable yearly rate of return on investments of 10%, both Jane and Joe would be retiring with an IRA worth $182,926. Jane would have a yearly income of $43,783 (with a COLA), and Joe’s would be $48,355 (without a COLA). (With the required minimum cost of living adjustment of 2.5%, Jane’s yearly income in 5 years would be $49,536).
At a rate of return based on the actual rates of return of the S&P index less a 1% broker fee, both Jane and Joe would be retiring with an IRA worth $113,577. Jane would have a yearly income of $43,783 (with a COLA), and Joe’s would be $35,281 (without a COLA).
As these figures reveal, the advantage of portability that comes with ARP comes with significant market risk and except under the most bullish market conditions, considerable cost.
|year||salary||2% SERS contribution||5% ARP contribution||5-2% FOR PERSONAL IRA||Total ARP contribution: 13%||Assume 6% return on IRA||ARP accumulations at 6%||IRA accum at 8%||ARP accum. At 8%||IRA accum. At 10%||ARP accum. At 10%||S & P yearly returns||S&P yearly less 1% fee||IRA accum based on S&P||ARP accum. Based on S&P|
|ARP accumulation less IRA||333,449||446,817||612,093||378,589|
|Annual Annuity Income based on $7900/100,000/year||26,342||35,299||48,355||29,909|
Tinfoil Handshake for ARP Retirees
The following table includes calculations of the total value of the state’s Retirement Incentive Program that was negotiated with SEBAC.
Table. Value of Early Retirement Incentive Program
Ending Salary Tier I and TRS Tiers II and IIA ARP
$60,000 $63,900 $54,315 $6,000
$70,000 $74,550 $63,368 $6,000
$80,000 $85,200 $72,420 $6,000
$90,000 $95,850 $81,473 $6,000
$100,000 $106,500 $90,525 $6,000
Assumptions: Retire at age 65 with average remaining life expectancy of 17.75 years according to actuarial estimates (see Teresa Ghilarducci, When I’m Sixty-four, Princeton University Press, 2008, p. 183).
As you can see from the table, members of the Alternate Retirement Program (ARP)—87.2 percent of the faculty at ECSU—are at a gross disadvantage. Those who accept the early retirement offer in SERS and TRS will receive from 10 to 18 times-- depending on final salary and retirement plan-- what ARP members who accept the offer will receive.
The offer of the state to “procure a life annuity” is of little or no value. All the state would do is to sell our annuity business to the same private companies that have been managing our accounts all along.
As has become apparent to nearly all, the 401(k) approach to retirement has failed for retirees. As a result we look forward to less than half the retirement incomes of our colleagues in the publicly supported SERS and TRS plans.
Enough is enough! Instead of the state perpetuating the gross inequality of its retirement systems, it should be developing a rescue plan for ARP members. Such a plan should allow ARP members the choice of taking their accumulations out of the private sector and buying into the state pension system (SERS).
At the least, it should offer publicly financed annuities for sale to ARP retirees. Since the state would not have to take commissions or charge exorbitant hidden administration fees, the annuities could be offered at significantly more favorable terms to retirees than could the private financial services industry; at the same time they would not increase the state’s debt since we would be purchasing them at their actuarial values.
THE STATE OF CONNECTICUT ALTERNATE RETIREMENT PROGRAM
CRISIS FOR RETIREES AND A REFORM PROPOSAL
James W. Russell
CSU Professor of Sociology
Committee for Equity in Retirement
Eastern Connecticut State University
The bad news is that if you are in the State of Connecticut Alternate Retirement Program (ARP), your retirement income will be less than half that of our colleagues in the State Employees Retirement System (SERS). Even if the stock market recovers, most of us will not be able to retire unless we are willing to accept a precipitous drop of income to significantly below what retirement experts say we should have—60 to 85 percent of final pay. Some of us who opted out of Social Security are in even worse shape.
The good news is that there is something we can do about it to achieve parity with our SERS colleagues and achieve a dignified retirement: work for a reform—the retirement equity proposal--that would allow us to roll over part of our accumulations to purchase years of credit in SERS. Before we discuss that proposal, though, we first need to understand how retirement systems work and why we are in the predicament we are in.
Defined Benefit and Defined Contribution Systems
There are two fundamentally different types of retirement systems in the United States: defined benefit system like SERS and defined contribution systems like the one we have, ARP.
Defined benefit systems include Social Security at the federal level and SERS and the Teachers Retirement System in Connecticut. The retiree’s benefit is determined by number of years worked and a percentage of the final salary—2 percent is common. For example, if a worker works for 23 years and the final salary is $90,000, then she or he would get 23 X 2 percent = 46 percent of $90,000. If you worked 35 years, it would be 35 X 2 percent = 70 percent of $90,000. The employer guarantees that this income will be available. The financing: is on a pay-as-you-go basis. Money collected from active workers is transferred to retired workers, hence transfer payments. The participant accumulates years of service at different salary levels rather than money in a particular account.
Defined contribution systems include ARP--414(h), IRAs, 401-K, 403-B, 457. Pretax deductions are made from workers paychecks which may or may not be matched by employer contributions. The deductions are invested in stocks, bonds, and money market funds, resulting in individual portfolios which are used to then finance the retirement income. In most cases workers when they retire purchase annuities. An annuity is a contract in which the worker gives to a company a sum of money in return for receiving a lifelong rate of interest income. A typical interest rate is 6 percent. Thus for each $100,000 accumulated, a retired worker would receive a $6,000 annual income. It would take one million dollars to receive an annual retirement income of $60,000. In defined contribution systems there is no guarantee of retirement income. All of the risks of investments are assumed by the employees.
Table 1: Defined Benefit and Defined Contribution Systems
|DEFINED BENEFIT||DEFINED CONTRIBUTION|
|Examples||Social Security, SERS, TRS||ARP, 401(k), 414(h), 403(b), IRA, 457|
|Cost to Employee||
varies from non contributory to percent of salary
|percent of salary (with or without employer match)|
|Financing||pay-as-you-go; investments||investments in stocks, bonds, and money market funds|
|Retirement Benefit||Guaranteed pension with or without COLA; size of pension depends on number of years of service multiplied by a percent of final income||Not guaranteed; size of retirement income depends on size of accumulated value of investments which, upon retirement are usually in an income annuity with or without COLA|
From the point of view of employees, defined benefit systems carry the advantage that their retirement benefits are guaranteed no matter what happens with the stock market. They are also usually much higher than defined contribution benefits. From the point of view of the employer, defined contribution systems carry the advantage that all of the risks of stock market investments are shifted to the employee with the employer assuming no responsibility for the size of the resulting retirement income. There are other advantages and disadvantages, as we will see, in the particular cases of how the two systems function for State of Connecticut employees and retirees.
SERS and ARP in Connecticut
The disadvantages of the ARP system compared to the SERS system for Connecticut state employees are especially clear, as indicated by Table 2. The SERS retirement benefit includes an annual cost of living adjustment (COLA) so that the retirement income will keep up with inflation. The ARP retirement benefit is on a fixed annual income basis. ARP participants must contribute, minimally, two and a half times more of their salaries than SERS participants. In sum, ARP participants pay much more for a retirement benefit that is worth much less than the SERS benefit.
Table 2. SERS and ARP
|Employer Contribution||N/A||8 percent of employee salary|
|Employee Contribution||Tier I--2% of salary, Tier II--0%; Tier IIA--2%||5 percent of salary|
|Retirement Benefit||Years X 1.7 to 2.0% of average of 3 highest salary years, depending on the Tier--see Table 4||7.5% fixed income annuity or 5% if with COLA currently|
|Example||Tier I--23 years @ 2% of $95,179=$43,782 annual pension plus COLA. Tiers II and IIA= $34,454 plus COLA||$480,000 X .05 = $24,000 income annuity plus COLA. (Note that ARP employees contribute two and one-half times as much of their salary over the years to achieve this income than SERS tier I or IIA employee do to achieve their pension incomes; Tier II members do not contribute anything.)|
The Historical Context
Before 1980s most public and private sector workers had, in addition to Social Security, defined benefit pensions. Beginning with the Reagan Administration in 1981, there has been a massive campaign to shift away from defined benefit to defined contribution systems. This was in line with conservative economic philosophy. It freed up money that had been dedicated to financing retirement for investment in the stock market. It was a boon for the financial services industry. Privatization of Social Security was the final goal of this campaign.
Today only a quarter of private sector workers still have defined benefit pensions. However, 90 percent of state and local government workers continue to have defined benefit pensions. Pensions thus are alive and well among public sector workers. Those of us in ARP are in the 10 percent minority.
The campaign to privatize retirement systems was more aggressive in Latin America, where Chile under a military dictatorship completely privatized its retirement system—for everyone but the military who retained pensions for themselves. Then the Chilean model was used to privatize retirement in ten other Latin American countries. George W. Bush praised the Chilean model during his ill-fated attempt to privatize Social Security in the U.S. By 2000 it became clear that the Chilean system was failing to produce adequate incomes for newly retirement incomes. The Chilean government then had to subsidize those incomes with supplemental payments.
The United Kingdom began privatizing its national retirement system under Margaret Thatcher. But then in 1991 it began to realize that new privatized system was not delivering sufficient income for retirees and allowed people to switch back into the defined benefit pension system.
In Connecticut before the late 1970s all state employees were in SERS. Some also had TIAA accounts from previous university employers. ARP was formed for reasons other than the Reagan reforms but it was in line with them. It originally carried the advantage that you could save with pre-tax dollars whereas those in SERS could not. Now SERs participants can also save with pre-tax dollars and ARP participants no longer have that as an advantage.
ARP was set up so that participants were not in Social Security, unlike SERS participants. In the late 1980s labor unions reformed ARP to allow participation in Social Security. Those who already were in ARP could voluntarily join. New ARP employees were automatically enrolled.
The default for already-existing ARP participants was that if they did nothing, they would not be enrolled in Social Security. That has had disastrous long term consequences for many of our colleagues now approaching retirement without Social Security coverage. In general, we can say that there are three classes of pre-retirees: (1) Those with SERS and Social Security Coverage; (2) Those with ARP and Social Security coverage; and (3) those with only ARP coverage.
To join Social Security at the time required an additional 6.25 percent deduction from the pay check. That was seen by many as being equivalent to an expensive pay cut. At the time the rumor, like now, was that Social Security was going broke, so it wasn’t worth putting money in it. Some used the money to invest privately, most probably used it to pay bills. Those who saved the 6.25 increases in income in retirement investments have found that the resulting retirement income will be less than if they had joined Social Security.
In 1984, Tier II replaced Tier I in SERS. In 1997 Tier IIA replaced Tier II. Each replacement is less generous than the preceding, but not dramatically so—contrary to popular belief. The least generous of the tiers is dramatically more generous than ARP.
In the 1990s and 2000, the State realized that it had been underfunding SERS. It increased the employer contributions to make sure that the participants would get their promised retirement incomes. Thus, today the State puts in 14 percent for each SERS participant versus 8 percent for each ARP participant. The language in the state statutes is that the state will contribute what is “actuarially necessary” for SERs participants. When it becomes more widely known that we will not have enough to retire on, there will be no similar effort—because our incomes are not guaranteed. Also, and very insidiously, the nature of ARP is that responsibility is vested in the individual. Hence if you don’t have enough, you—rather than the system—will be blamed. It’s your fault because you did save enough or invest wisely enough. Many have internalized this and blame themselves even though few have investment portfolio expertise.
In 2005 the State, without the consent of ARP participants, changed from non-profit TIAA-CREF to for-profit Dutch multinational, ING. It stated it is because ING charged lower management fees. The rumor was that it was to keep ING from moving a headquarters to North Carolina. If it was the latter, it was illegal because the state has a fiduciary responsibility to act in theinterest of plan participants, not citizens of Connecticut.
In 2006 the State of New Hampshire began an investigation of whether ING was “committing fraud and allowing improper trading in its state retirement plan” (New York Times, June 10, 2006). Investigations of ING retirement plan practices were also underway in New York.
In 2008 ING had to be bailed out by the Dutch government (New York Times, October 21, 2008). TIAA-CREF remains financially sound because of its more conservative investment strategy, lower management compensation packages, etc.
The Retirement Equity Proposal
I have investigated legal action with four lawyers. All agree that what has happened to us is enormously unfair: (1) Our choices to enter ARP were not informed choices. We were not given a full explanation of the differences between the two systems. (2) The choices in most cases were loaded. In the 1980s it took 10 years to be vested in SERS, and faculty didn’t know if they would get tenure. (3) Making the choice irrevocable is unfair. We can change health insurance plans. Why shouldn’t we be able to change retirement plans?
But it may not have been illegal—I say may not because we still do not have a definitive legal opinion, which is costly. All of the lawyers have concurred that our unions should be addressing the issue and that it should be done either through a policy change in the State Retirement Commission or a legislative bill.
We could try to get back into TIAA-CREF. But, even if we won, we would gain little beyond being with a company that many of us trust more. It would not gain us an adequate retirement income.
The best solution is to buy years of credit—purchase service credits—in SERS. This is allowed in many states, but, currently, not in Connecticut. Purchasing service credits is also allowed for certain categories of people in Connecticut—e.g. war service, municipal employees. (See also the appendix article about the West Virginia teachers who were allowed to switch back into the state pension plan after their 401K plans did not perform adequately.)
We would use part, not all, of our accumulations to purchase years of credit for a pension.
There would be clear income and security advantages for us to do this. There would also be advantages for the state:
-infusion of cash into SERS
-people at top salaries could retire, thereby saving the state money.
-as with all social insurance and defined benefit plans, the state would receive more money than it expended on retirees who were short lived after retirement.
Purchase of Service Credits Example
Assumptions: ARP participants would be able to buy-in for the cost of what the state contributed to ARP (8 percent of salaries) plus 5 percent compounded interest. This is the formula that the state uses for buy-ins by municipal employees. As an example, I have in Table 3 used my starting salary in 1986 and my “maxed-out” salary in 2008, that is, the top Professor salary. I have assumed, for ease of calculation, that there were equal annual raises between 1986 and 2008. In reality, the raises were unequal. This calculation, though, should be very close to using the actual raises. NB: There are different formulas for purchasing service credits. Thomas Woodruff, the director of state retirement has suggested a formula that would be more costly. Other states use formulas that are less costly. This would be a point of negotiation.
Table 3. Hypothetical Example: Cost of Purchasing 23 Years Service Credits in SERS
Year Salary Salary X .08 plus 5 percent compounded interest until 2008
1986 28,000 2,240 6,880
1987 31,199 2,496 7,301
1988 34,398 2,752 7,667
1989 37,597 3,008 7,981
1990 40,796 3,264 8,248
1991 43,995 3,520 8,471
1992 47,194 3,776 8,655
1993 50,393 4,031 8,799
1994 53,592 4,287 8,912
1995 56,791 4,543 8,995
1996 59,990 4,799 9,049
1997 63,189 5,055 9,078
1998 66,388 5,311 9,084
1999 69,587 5,567 9,068
2000 72,786 5,823 9,033
2001 75,985 6,079 8,981
2002 79,184 6,335 8,914
2003 82,383 6,591 8,833
2004 85,582 6,847 8,739
2005 88,781 7,102 8,633
2006 91,980 7,358 8,518
2007 95,179 7,614 8,394
2008 98,378 7,870 8,264
TOTAL $196,497 (buy-in cost for 23 years credit)
Table 4. Hypothetical Example: Calculating SERS Buy-in Costs for 23 Years and Resulting Pension Incomes
|Tier I (to 1984)||Tier II (1984-1997)||Tier IIA (1997-)|
|Buy-in Cost||(State contributions to ARP of 8% of salary plus 5 % compounded interest) plus (2% employee contribution to SERS plus 5% compounded interest) = $245,621||State contributions to ARP of 8% of salary plus 5 % compounded interest = $196,479||(State contributions to ARP of 8% of salary plus 5 % compounded interest) plus (2% employee contribution to SERS plus 5% compounded interest) = $245,621|
|Pension Income||.02 X Average of 3 highest income years X years of credit service. .02 X $95,179 X 23 = $43,782||
(.0133 X Average of 3 highest income years) plus (.005 X salary in excess of breakpoint for year of retirement) X years of service. (.0133 X $95,179 = $1,265.88) plus (.005 X $46,379 = 232) = $1,498 X 23 years of service = $34,454 pension
Same as Tier II but with slightly different breakpoints. (.0133 X $95,179 = $1,266) plus (.005 X $46,279) = $1,498 X 23 years of service = $34,454.
Table 5. Summary Comparison of Costs and Annual Yields Between Purchasing an ARP Annuity and Purchasing 23 Years SERS Service Credits
|Cost||ARP annuity with COLA at 5 %||Tier I pension with COLA||Tier II pension with COLA||Tier IIA pension with COLA|
1. Alternate Retirement Program incomes, even when the stock market is good and we save a lot beyond the current 5 percent employee contribution, are dramatically less than SERs incomes and insufficient to allow us to retire with dignity.
2. To resolve this inequity, we need to be allowed to roll over part of our accumulations to purchase years of credit in SERS, as is allowed in other states and for certain categories of persons in Connecticut.
3. This reform has clear advantages for us and our employer.
Annuity: type of investment in which the investor gives to the seller a sum of money in return for a lifetime income at a determined rate of interest. A typical annuity for a recently retired
person would be at 6 percent. For example, the retiree would pay $100,000 for a guaranteed annual income of $6,000 for the rest of her or his life. A one million dollar annuity at 6 percent would yield an annual income of $60,000.
ARP: Alternate Retirement Program. The defined contribution program for Connecticut in which the employer (the State of Connecticut) invests 8 percent and the employee 5 percent of salary in stocks, bonds, and money market funds that are managed by ING. The accumulation is then used to finance the retirement, usually through purchase of annuities.
COLA: cost of living adjustment. This is the raise to annual defined benefit pension income due to inflation. In Connecticut, SERS and TRS retirees receive a cost of living adjustment each year; ARP retirees do not.
Defined Benefit Plan: type of retirement system in which the participant is guaranteed by the employer a retirement income based on a formula that considers length of employment and final salary level. Defined benefit plans are largely financed on a pay-as-you-go basis in which the contributions of active workers are used to pay the benefits of retired workers. The financing of Social Security is an example of pay-as-you-go financing. The State Employees Retirement System (SERS) and Teachers Retirement System (TRS) are defined benefit plans for State of Connecticut and Connecticut public school employees.
Defined Contribution Plan: type of retirement system in which the employee saves with pretax dollars, with or without an employer contribution, to finance her or his retirement. The savings are invested in stocks, bonds, and money market funds. The resulting accumulation is then used to usually purchase annuities upon retirement. The risks of the investments are borne by the employees with there being no guarantee of retirement income. Examples include the Alternate Retirement Program (ARP), 401K, IRA, 403B and 457 plans. (Most of the names refer to provisions of the IRS tax code.)
ING: a Dutch multinational corporation that manages the portfolios of ARP participants in Connecticut. In 2005 the State of Connecticut, without the consent of ARP participants, transferred management of ARP from non profit TIAA-CREF to for profit ING. The state maintained that it had a legal right to do so.
Pay-as-you-go: refers to financing of defined benefit retirement systems where money collected from active workers is used to pay retired workers.
SERS: State Employees Retirement System. The defined benefit program for Connecticut in which the employer contributes, on average, 14 percent of salary of active workers to pay guaranteed pension benefits to retired workers. There are three different SERS pension plans, depending upon date of first hire. Tier I covers workers up until June 1984, Tier II from July 1984 to June 1997, and Tier IIA from July 1997 to the present. Tiers I and IIA require 2 percent employee contributions, Tier II is noncontributory. Each plan has a different formula for determining pension benefits. Tier I benefits are significantly higher than the others. Tier II is slightly higher than Tier IIA.
Transfer payments: term used in defined benefit systems where a part of the income of active workers is deducted and used to make payments of retired workers.
TRS: Teachers Retirement System. A defined benefit program for public school teachers in Connecticut that a few university employees belong to by virtue of having previously been employed by school districts. Its normal retirement benefit formula is the same as Tier I of SERS: number of years of credit X .02 (average of 3 highest paid years) = annual pension plus COLA.
Comptroller’s Office, State of Connecticut
Meeting on the Alternate Retirement Program
September 16, 2009
My name is James W. Russell (RussellJ@easternct.edu). I am CSU Professor of Sociology at Eastern Connecticut State University. I specialize in the study of retirement systems in the United States and Europe.
I am also the co-chairperson of the Committee for Equity in Retirement, an organization formed in December 2008 at Eastern to address the crisis facing Alternate Retirement Program (ARP) participants and the State. We have rapidly grown into a statewide organization with representatives on nearly all campuses and are continuing to grow as more ARP participants realize how dire their situation is. To reach our website, Google “Connecticut ARP Crisis.”
The ARP Retirement Crisis
The State of Connecticut has a serious problem. Alternate Retirement Program (ARP) members, concentrated in higher education, cannot afford to retire at the normal retirement age of 66. That means that they will not be able to vacate their positions at the top of pay scales to lower cost younger employees.
The results of the 2009 Retirement Incentive Program (see appendix table) overwhelmingly show this problem. Only 1.4 percent of ARP members eligible to retire at Connecticut State University accepted the state’s offer compared to 42 percent of State Employee Retirement System (SERS) participants and 52.9 percent of Teachers Retirement System (TRS) participants. At the University of Connecticut only 2.3 percent of eligible ARP members accepted the RIP compared to 33.9 percent of SERS members. We do not have figures for the community colleges but suspect they are similar.
ARP members will not be able to afford to retire even if the stock market rebounds to its 2008 level. They contribute to their program more than twice what SERS participants contribute, yet they receive in retirement benefits less than half as much. The 2008 stock market crisis, to use a medical analogy, turned a chronic condition into an acute one. The stark choice facing ARP members is to either retire at normal retirement age into a sharp plunge of living standards or work well into their 70s and 80s and still have inadequate retirement support.
To make matters even worse, a sizeable number of the cohort of ARP participants approaching retirement age will not be eligible for Social Security benefits. ARP was established in 1975 with no provision for Social Security participation, unlike SERS. When the option to participate in Social Security became available in 1988, a number chose not to, often because of bad or nonexistent advice. Their situation is especially critical. The prospect of retirement poverty for them is real.
When ARP members elected that program, they were under two disadvantages. First, the state did not provide them with adequate information to make an informed decision. Most were directly or indirection steered into the program. Second, most state employees have probation periods within the first six months and then attain employment security. They can elect their retirement system based on knowledge that they have secure positions. But most higher education employees do not know whether they will have security (tenure) for up to six years. Since SERS originally required ten years to vest, election of it was to the disadvantage of higher education employees. If employment tenure was not secured, then there would be no employer-contributed retirement benefits that would stay with the exiting employee. The ARP employer contribution of 8 percent of salary, on the other hand, would remain with the employee. This portability feature of ARP was very attractive to new higher education employees who had no idea of how long they would last in their positions. They were thus faced with a loaded choice.
What is particularly insidious is that once ARP members either realized that they were in an inferior retirement system or had employment security on which to make a permanent decision, they were told that their original decision to join ARP was irrevocable. They were not told that at the time of election. It is strange that if one makes a mistake in buying a house, he or she can get out of it by selling it. Even if one makes a mistake in marriage, he or she can get out of it through divorce. But there is no current way for state employees to get out of a bad retirement system. They are trapped in a form of financial serfdom.
Fortunately, there is a solution that will benefit both the state and ARP participants: (1) allow ARP participants to purchase at actuarial value service credits in SERS; and (2) sell state-backed nonprofit annuities to all retiring state employees.
Allowing ARP members to buy into SERS will not add liability to the state pension fund, contrary to what many people think. That is because they would be buying in at actuarial value. The actual cost of SERS to the state is the same or less than that of ARP. The reason the state currently contributes more for SERS than ARP members is to make up for past underfunding and/or borrowing from the fund. SERS is not an inherently more expensive retirement system. By purchasing service credits, ARP members would be fully funded in SERS. They would strengthen the system, helping to compensate for underfunded current SERS members.
ARP members buying in to SERS will increase its revenue and pool size. As ARP members enter SERS with rollovers of accumulated funds and increase the pool, the state will have to contribute less per member to make up for previous underfunding. The state will be able to recapture retirement contributions currently being drained off to private companies.
Since high salary ARP members cannot afford to retire, it is to the state’s advantage to let them into SERS so that they can retire and be replaced by less seniority, lower salary employees.
Aside from it being to the state’s financial interest to allow ARP members into SERS, there are also compelling ethical reasons. The state has an obligation to employees who have put in 20, 30 and more years of loyal service to provide them with dignified retirements. As it is now, there are two classes of retirees: those in SERS who have an adequate plan and those in ARP who will have less than half as much, some of whom will face poverty in their retirement years. State employees should receive equal adequate retirement benefits for equal service.
Finally, this proposal is about choice. No one would be required to roll over ARP funds into SERS.
Challenges to Implementation
The proposal thus benefits both employees and the state. The question is how to put them into practice.
There are essentially three components: (1) allowing ARP members to enter SERS; (2) allowing them to purchase service credits; and (3) allowing them to roll over ARP accumulations to purchase those service credits. There is an abundance of precedents from Connecticut and other states for allowing purchase of service credits and/or rolling over defined contribution plan accumulations to purchase them.
To allow ARP members to enter SERS is the more involved step of the three components. It would require a change of a state statute (“no transfers between the state employees retirement system, and either the Teachers' Retirement Association or an alternate retirement program shall be permitted”—5-160h).
We have been told—but have yet to verify—that there is also a provision in the Internal Revenue System that mandates irrevocability of election of defined contribution retirement plans. If that is true, a concerted effort with the help of Connecticut’s congressional delegation—as occurred in 1988 to allow ARP members to opt into Social Security—could secure a repeal or waiver of that provision.
No one should assume that what we are proposing is impossible to achieve. In West Virginia in 2008 schoolteachers were allowed to shift from their defined contribution program, which like ARP was failing to produce adequate retirement incomes, into the state’s defined benefit pension system. Nebraska, which ended its defined contribution program after a benefits adequacy study, may also provide useful information.
The problem is clear for both the state and ARP members and the solution we are suggesting is achievable if there is the will.
To summarize, the failure of ARP to deliver adequate retirement benefits to its members has created a crisis for the State of Connecticut as well as the members themselves. The state cannot replace high cost employees with lower cost ones because the former cannot afford to retire. Fortunately there is a simple, direct solution: allow ARP members who choose to do so to roll over their accumulations to purchase service credits in SERS, the state’s other retirement system that does provide adequate retirement benefits.
Results of the 2009 Retirement Incentive Program (RIP)
Connecticut State University
ARP SERS TRS TOTAL
Employees eligible for the RIP 353 431 17 605
Employees electing to retire 5 181 9 195
Percent electing to retire 1.4 42.0 52.9 32.0
University of Connecticut
Employees eligible for the RIP 473 594 n.a. 1067
Employees electing to retire 11 200 n.a. 211
Percent electing to retire 2.3 33.9 n.a. 19.8
Sources: David P. Trainor, Associate Vice Chancellor for Human Resources and Labor Relations, Connecticut State University; internal memo, University of Connecticut.
How to Quickly Calculate Approximate ARP versus SERS Retirement Incomes
1. ARP: Your ING accumulation X .05 = first year retirement income. Subsequent years will increase by cost-of-living-adjustments.
A. Tier I (began state employment in 1985 or before): Number years of state service X .02 X final annual salary = first year retirement income. Subsequent years will increase by cost-of-living-adjustments.
B. Tier II and IIA (began state employment after 1985): Number of years of state service X .016 X final annual salary = first year retirement income. Subsequent years will increase by cost-of-living-adjustments.
Notes: These are approximate comparisons. Annuities have different rates with .05 being the current average for ones that include a COLA equivalent to that of SERS. The actual SERS formulas are more complicated. They can be found online with links from our website. The employee costs for ARP are two and a half times those of Tiers I and IIA (5 percent versus 2 percent of annual salaries); and there is no employee cost for Tier II.
Central Connecticut State University: Stephen Adair (Adairs@mail.ccsu.edu)
Eastern Connecticut State University: Marcia McGowan (McGowan@easternct.edu)
University of Connecticut: Michael Kurland (email@example.com)
Western Connecticut State University: John Briggs (firstname.lastname@example.org)
All others: James W. Russell (RussellJ@easternct.edu)
ARP and Social Security Benefits
If you joined ARP (Alternative Retirement Plan) before 1990, your Social Security (SS) Benefits may be impacted.
Before 1990, participants in ARP did NOT pay into Social Security. In 1990, as a result of an arbitration agreement between SEBAC (State Employees Bargaining Coalition) and the State, Social Security was added to the retirement package for ARP. Anyone hired after 1990 was automatically enrolled in Social Security contributions. Those already in ARP were given a one time opportunity to choose whether or not to opt in to SS. Opting in means the employee and the employer each contribute 6.2% of salary in taxes to Social Security and 1.45% in taxes for Medicare. Some ARP participants did not opt in to Social Security because they had worked at other jobs where they contributed to Social Security and believed they already had enough Social Security credits. Human Resources personnel told some of us that we would get the maximum Social Security benefit if we had paid into Social Security taxes for 10 years. Unfortunately, this information was incorrect. Others were under the impression that they could collect off their spouse’s Social Security contributions.
1983 changes to Social Security
Beginning In 1983, significant changes were made to Social Security rules that impact ARP participants.
· Windfall Elimination Provision (WEP)
The Windfall Elimination Provision affects how the amount of your retirement is calculated if you receive a pension from work where Social Security taxes were not taken out of your pay. A modified formula is used to calculate your benefit amount, resulting in a lower Social Security benefit than you otherwise would receive. (Source http://www.socialsecurity.gov/pubs/10045)
The WEP applies unless you paid SS tax for at least 30 years. The maximum reduction for someone retiring in 2010 is $380/month.
· Government Pension Offset (GPO)
This provision affects the amount of your SS benefits if you are collecting off your spouse’s SS contributions.
Your Social Security benefits will be reduced by two-thirds of your government pension. In other words, if you get a monthly civil service pension of $600, two-thirds of that, or $400, must be deducted from your Social Security benefits. For example, if you are eligible for a $500 spouse’s, widow’s or widower’s benefit from Social Security, you will receive $100 per month from Social Security ($500 – $400 = $100).
If you take your government pension annuity in a lump sum, Social Security still will calculate the reduction as if you chose to get monthly benefit payments from your government work. (Source: http://www.ssa.gov/pubs/10007.pdf )
· Higher taxable earnings ceiling and higher number of years counted
Your benefit even before WEP or GPO deductions will be lower because Social Security benefits are based on an average of 35 years of earnings (not 10 years as some of us were told). Some of the years when you weren’t paying SS taxes will be averaged in as $0 earnings to total 35 years. Also, your earnings in your early years of working are likely to be much less than now.
Social Security retirement benefits normally replace about 40% of pre-retirement earnings. This author will be getting about 5% (with 15 years of SS contributions). You can find out what your benefit will be by contacting Social Security or by using their on-line calculator. http://www.ssa.gov/retire2/anyPiaWepjs04.htm
What can we do about this?
A subcommittee of the CT Committee for Equity in Retirement is exploring possible remedies, but it won’t be easy. Our argument is that insufficient information was provided to employees in 1990 to assist us in making this vital decision. We maintain that some of us opted out of Social Security on the basis of outright misinformation from HR. Our first tasks are to find out how many of us are impacted and to hire an attorney to explore possible remedies and to answer questions we have about how our SS benefits will be impacted.
There are national efforts to repeal the WEP & GPO. Bills are pending in Congress -- HR 235 and S 484. We urge everyone to take part in that effort. More information will be sent to those on the ARP - SS distribution list.
If you want to be kept informed of developments on this issue, send your email address to email@example.com. We need to show interest in this issue to obtain help with legal costs.
WE NEED HELP
We need more members on the committee and help with research, legal advice, and more. If you have any HR materials from the 1990 “election of Social Security” or a personal story of misinformation or steering, let us know. We need a good contact at Social Security Administration who can answer our questions about WEP etc. If you can help the committee in any way, please contact one of the co-chairs:
Deena Steinberg: firstname.lastname@example.org
Rachel Siporin: email@example.com
LIVINGSTON, ADLER, PULDA, MEIKLEJOHN & KELLY, P.C.
557 PROSPECT AVENUE • HARTFORD, CONNECTICUT 06105-2922
TELEPHONE: (86O) 233-9821 • FAX (86O) 232-7818
NEW LONDON OFFICE: (86O) 43 7-O589
October 13, 2009
Linda Yelmini, Director
Office of Labor Relations
450 Capitol Avenue
Hartford, CT 06106
Robert Rinker, Executive Director
760 Capitol Avenue
Hartford, CT 06106
Bob and Linda:
Please process the following as a grievance under the SEBAC agreement:
Management representatives at some, if not all, of Connecticut's higher
education institutions have engaged in a practice of steering bargaining unit employees into the Alternate Retirement Plan. In addition, the higher education employers have not provided adequate time and information in selection of a retirement plan.
The remedy sought with respect to steering is (1) individual employees who were
directly or indirectly steered into the Alternative Retirement Plan will be given the
opportunity to switch their retirement plan with full credit for all service and appropriate
adjustments to their ARP accounts; and (2) higher education employers will be directed
not to steer employees into the Alternate Retirement Plan.
In addition, to remedy the ongoing failure to provide adequate information and
time to make a decision even in the absence of steering, the remedy sought is: (1)
provide correct and neutrally written information on all three retirement plan options to
all new employees prior to the selection of their retirement plan. This information should also include differences, if any, concerning the effective date of coverage under the three plans; (2) provide adequate time to select a plan - no less than two weeks following the provision of correct and neutrally written information about the plans (but in no event less than the 90 days to 6 months from date of hire provided under current practice); and (3) provide written documentation to be signed off by the individual employee and the affected union that they have been given written information on all retirement plan options available to the employee and adequate time to consult and make a decision on their retirement selection.
Thank you for your prompt attention to this matter.
Very truly yours,
Counsel and Chief Negotiator
How Much Do You Need to Accumulate in ARP? (worksheet)
The short answer to this all important question, according to retirement experts, is that you need an amount that, when added to Social Security income, will yield at least 70 percent of your final salary. The following worksheet is based on that assumption. For those far away from retirement, it will be difficult to estimate the final salary. For those at or approaching retirement, it is much easier.
1. Final yearly salary ____________
2. Minimum yearly retirement income needed ________ (multiply figure in 1 by .7)
3. Social Security yearly income __________ (look up your estimated full retirement benefit from your Social Security statement. It is estimated as monthly income. Multiply that by 12 to get your yearly income).
4. ARP + 403(b) yearly income needed _________ (subtract 3 from 2)
5.ARP + 403(b) accumulation needed ____________ (multiply figure in 4 by 20)
Example: final income of $100,000
1. Final yearly salary: $100,000
2. Minimum yearly retirement income needed: $100,000 X .7 = $70,000
3. Social Security income: $22,776
4. ARP + 403(b) yearly income needed: $70,000 - $22,776 = $47,224
5. ARP + 403(b) accumulation needed: $47,224 X 20 = $944,480
Notes: Accumulation needed is for purchase of a full life annuity that includes a cost of living adjustment at the current rate of 5 percent; the state contributes 8 percent and employees 5 percent of salaries for ARP. The 403(b) plan contains supplemental employee contributions.
Comment: The Connecticut Committee for Equity in Retirement has concluded that very few if any ARP participants will be able to accumulate enough funds to ensure minimally necessary retirement incomes.
ARP, the Market, and Annuity Rates
In comparing SERS and ARP benefits, CCER looks at lifetime annuity rates. SERS participants will receive lifetime pensions; ARP participants can purchase lifetime annuities. We have documented that typical ARP accumulations will only be sufficient to purchase annuities that would have less than half the income of SERS pensions for comparable years of service and final salaries.
The size of annuities that can be purchased depend on the size of the ARP portfolio and the rates for annuities prevailing on the commercial market.
Defined-contribution (DC) plan proponents—ARP is a DC plan—counsel us to have patience and wait for the market to recover. But we believe that even in the most bullish of markets our portfolios will not be large enough to ensure retirement incomes close to those of SERS. Right before the 2008 stock market bust, when the Dow Jones was at an artificial high of over 14,000, typical ARP portfolios were not large enough to assure retirement incomes as high as SERS pensions.
DC plan proponents then fall back on the argument that annuity rates are at a historical low and that when they rise again it will be possible to purchase annuities with decent rates.
To evaluate that argument it is necessary to understand that annuity payout rates are different than ordinary interest rates. When you receive interest from a bank, you retain ownership of the principle while allowing the bank to invest it. When you purchase an annuity you surrender ownership of the principle as well as allowing the annuity company to invest it. The payout rate thus includes both the interest and an amortization rate for the principle. Payout rates are thus always higher than interest rates.
Payout rates vary less than interest rates because they are in large part determined by amortization rates on the principle. The principle invested in the annuity obtains a rate of return. That return along with a portion of the principle is paid out at a rate based on the number of years of life expectancy.
Amortization rates depend on actuarial estimates of longevity which are not determined by market conditions and do not vary as much.
Nevertheless, to test the possibility that annuity payout rates might rise sufficiently to assure equitable retirement income, we examined payout rates between 2000 and 2010. We found that there was not much variation—between 5.2 and 6.1 percent for rates that included a cost of living adjustment to make them comparable to SERS pensions. A 6.1 percent annuity rate would obviously be better than a 5.2 percent one, but it would be hardly sufficient to obtain an income remotely close to that of a SERS pension.
Comparing SERS and ARP Disability Benefits
A number of people have asked us how disability payments under the Alternate Retirement Program (ARP) compare to what is provided under State Employees Retirement System (SERS) Tiers I, II and IIA. Here is a summary of the differences. Full information can be found at the links below.
Disclaimer: This is one CCER member’s attempt to decipher and summarize the information on the state website. I make no claims about its accuracy or the accuracy of my interpretations!
Since ARP is a defined contribution 401 plan and not a defined benefit plan, ARP recipients cannot get a “disability pension”. Instead, the state purchases disability insurance for ARP recipients (as a result of the 1989 SEBAC arbitration agreement).
The insurance certificate is at http://www.hr.uconn.edu/docs/prudentialcert.pdf
The insurance provided to ARP through Prudential pays 60% of your salary (up to a maximum of $7000/month), starting 6 months after you are out of work due to disability.
Payments such as Social Security Disability Insurance are deducted from the Prudential benefit. Payments increase by a 3% COLA each year.
The maximum amount of time you can receive benefits depends on your age when you become disabled, but generally ends at 65. (See page 3 of the certificate).
When your Prudential payments end, your income reverts to whatever you can get from your ARP accumulation.
SERS disability retirement payments are based on several factors including which Tier, whether the disability is service-connected, your years of service when you become disabled, and the years of service you would have if you continued working until age 65.
The critical difference however, is that SERS guarantees a minimum payment of 60% of your salary rate at the time you became disabled, even if the calculation based on the above factors would be less. Payments like Security Disability benefits do not count unless your total benefits would be more than 80% of your salary. In that case they reduce your SERS retirement to limit your total combined disability income to 80%. I assume SERS disability pensions increase each year by the usual COLA for SERS retirement pensions (2.5% – 6%) but the website did not address this.
I think the bottom line is:
1) SERS disability benefits are between 60-80% of your salary. ARP recipients receive a maximum of 60% of salary.
2) SERS participants can retire on a disability pension and continue to receive 60-80% of their pay for life. ARP participants lose their Prudential disability benefits, usually at age 65. Their retirement income would then revert to whatever their ARP accumulation can provide. It is unlikely that anyone has an ARP account that would provide anywhere near 60-80% of pay.
3) ARP disability payments are limited to $7000/month. I don’t think there is a limit for SERS disability pensions.
Here are the details for each plan:
Tier I http://www.osc.state.ct.us/empret/tier1summ/tier1summ.htm#DISABILITY
Tier II http://www.osc.state.ct.us/empret/tier2summ/tier2summ.htm#DISABIL
How ARP Discriminates Against Women
As a defined-contribution plan ARP is set up so that participants will accumulate funds during their working lives and then purchase annuities with those funds to finance their retirement. They could also actively manage their portfolios during retirement, but most experts agree that annuitizing produces more stable income security.
The annuity business is based on calculating life spans. Since women live on average longer than men, they will collect an annuity longer. To compensate for making more payments to women, issuers of annuities lessen each payment to female retirees.
Vanguard’s annuity calculator allows a test of this. Inputing a 65 year old male with $100,000 to spend produces a quotation for a single life fixed monthly annuity of $692.60. Changing the gender produces a new quotation of $633.67--8.5 percent less.
While this discrimination may make sense actuarially, it does not make human or social sense. We can safely assume that the monthly cost of living of women is not 8.5 percent less than that of men.
The formulas for determining SERS pensions do not distinguish men from women.
How Much Would It Cost to Buy Into SERS? Cavanaugh Macdonald Actuarial Study Results
The actuarial firm Cavanaugh Macdonald has released the results of its study of what it would cost for Alternate Retirement Program (ARP) members to change to the State Employees Retirement System (SERS) and purchase service credits (years of credit) within it on a revenue neutral basis. That is, we would be rolling over money from our ARP and other retirement accounts to obtain fully prefunded pensions from SERS that would not add unfunded liability to the system.
To access the results, click here.
Before we go further, we must emphasize that the state has yet to agree to this buy-in arrangement. This is only information about the possible costs to ARP members to buy into SERS if the state is in agreement—a big if.
If this goes through, it will not be an equitable remedy to the ARP crisis. We still would be paying much more for the same benefits than SERS members who had not been in ARP. But it would nevertheless leave us with much more retirement security than we have now.
We were happy to see that the study, obeying legal requirements which do not exist for ARP annuities, based its buy-in costs on blended gender longevity assumptions to avoid charging women more.
The results of the actuarial study confirm what CCER had assumed: The resulting SERS pensions will be much greater than commercial annuities that could be purchased for the same amount of ARP accumulations. Most ARP members, however, will not have enough within their 401(a) accounts to make those purchases. They will need to transfer also supplemental retirement savings from 403(b) accounts or accounts from previous employers, if they have any. For those who only have their ARP 401(a) accounts, arrangements will need be developed so that they can either purchase fewer service credits or enter into payroll deduction plans to make up differences. In addition, arrangements will have to be made for how TIAA balances can be used to purchase service credits, since TIAA regulations only allow them to be paid out over a ten year period.
Tables 1 and 2 offer examples of costs of buying into the different SERS tiers for different incomes, ages, and years of state service. The table indicate that in all example, there are dramatic differences between the sizes of resulting SERS pensions and what could be obtained if the same amounts were invested in ARP annuities.
Table 1: Examples of Buy-in Costs for Tiers II and IIA (first employed after middle of 1984)
Current Salary Buy-in Cost SERS Pension ARP Annuity
age 30, 5 years of service
$30,000 $ 9,552 X $ 477
$50,000 $ 15,920 X $ 828
$75,000 $ 24,682 X $ 1,283
$100,000 $ 33,674 X $ 1,751
$150,000 $ 51,579 X $ 4,229
age 40, 10 years of service
$30,000 $ 26,481 $ 4,800 $ 1,377
$50,000 $ 44,135 $ 8,000 $ 2,295
$75,000 $ 69,750 $12,000 $ 3,627
$100,000 $ 96,383 $16,000 $ 5,012
$150,000 $149,298 $24,000 $ 7,765
age 50, 15 years of service
$30,000 $ 52,527 $ 7,200 $ 2,731
$50,000 $ 87,545 $12,000 $ 4,552
$75,000 $142,246 $18,000 $ 7,397
$100,000 $200,084 $24,000 $10,404
$150,000 $314,697 $36,000 $16,364
age 65, 25 years of service
$30,000 $120,336 $12,000 $ 6,257
$50,000 $185,700 $20,000 $ 9,656
$75,000 $306,755 $30,000 $15, 951
$100,000 $434,513 $40,000 $22,595
$150,000 $690,028 $60,000 $38,881
Notes: Assumes an ARP annuity with a cost-of-living-adjustment at a 5.2 percent pay out rate beginning at age 65. Minimum age for beginning SERS pensions is 55. It takes 10 years service to vest in SERS.
Table 2: Examples of Buy-in Costs for Tier I (first employed before middle of 1984) _______________________________________________________________
Current Salary Buy-in Cost SERS Pension ARP Annuity
age 65, 27 years of service
$30,000 $180,954 $16,200 $ 9,410
$50,000 $301,590 $27,000 $15,683
$75,000 $452,385 $40,500 $23,524
$100,000 $603,180 $54,000 $31,365
$150,000 $837,750 $81,000 $43,563
Notes: Assumes an ARP annuity with a cost-of-living-adjustment at a 5.2 percent pay out rate beginning at age 65. Minimum age for beginning SERS pensions is 55. It takes 10 years service to vest in SERS.
We urge everyone interested in switching to SERS to examine the actuarial tables for themselves and calculate their own cost of buying in. You will need your age, current salary, number of years of service, and the tier number (I, II, or IIA) that was in effect when you were first employed by the state. If the tables seem daunting, just follow the procedure for the example of an $85,000 income that is in the “Results” section of the report or follow this procedure and example.
A. Current salary: $63,000
B. Years of service: 20
C. Age: 53
D. Tier: II
E. Buy-in cost. Go to tables to find multipliers.
(1). Current salary ($63,000) X first multiplier (2.6326) = $165,854
(2). For income above $54,800 ($63,000-54,800=$8,200), find multiplier from “Above
the Breakpoint” Tier II table (.915). Multiply income above the break point by
the multiplier ($8,200X.915=$7503).
(3) Add figure in (1) and (2). $165,854 + $7503 = $173,357 = BUY-IN COST
To determine what your approximate SERS pension would be if you bought in and immediately retired, multiply years of service (20) by .016 = .32 X Ending Income ($63,000) = $20,160. Note that in this example, the person would have to wait two years to begin collecting the SERS pension since the person is 53 and the minimum age to begin collecting is 55.
To compare the SERS pension with what you could get if you invested that money instead in a commercial market annuity (the ARP system), multiply the buy-in cost ($175,357) by the typical pay out rate for a commercial annuity that has a cost of living adjustment (5.2% or .052) = $9,119.
How the State and Taxpayers Would Benefit from Allowing ARP Members to Transfer to SERS
The buy-in reform is in the interests of the state and taxpayers because:
1. It will allow ARP member to retire and thereby vacate relatively high paid positions, thereby saving the state money.
2. It would bring an infusion of funds into SERS, thereby lowering the percentage of its unfunded liability.
3. The state would save money on its retirement contributions since the normal cost to of SERS to the state is lower than that of ARP despite widespread erroneous opinion to the contrary. ARP members would be transferring into SERS on a fully funded--without an unfunded liability--basis unlike existing SERS members.
4. State employees would be able to retire with greater financial security and resources, and therefore will contribute greater tax revenue to the state as well as the Connecticut economy generally.
Arbitor’s Award that Allows Transfer from ARP to SERS
In the Matter of the State of Connecticut And The State Employees Bargaining Agent Coalition ("SEBAC")
This matter having come before me and the parties having, upon recommendation agreed herewith, the following is hereby ordered and decreed.
In full and final resolution of any and all Pension Grievances filed by SEBAC or any of its constituent units regarding the alleged steering of employees to the Alternative Retirement System ("ARP"] including, but not limited to grievances filed on behalf of Janis Petrillo, Awilda Reasco and any and employees represented by SEBAC who are employed by any of the Higher Education Institutions defined below, the undersigned parties hereby agree to the following:
I. For purposes of this agreement, "plan" means the State Employees Retirement
System and the Alternate Retirement Plan. "Retirement plan option" or "plan option" means
a choice between plans, or where available, a choice of no plan. "Employee" means a
bargaining unit employee eligible by statute or collective bargaining agreement to make a
choice among plan options, or in the case of a part-time employee eligible under Chapter 66
of the Connecticut General Statutes to make a choice among plan options or pursuant to a
collective bargaining agreement, a choice not to be covered by a retirement plan. "Higher
Education Institution" shall mean the Connecticut Community Colleges, the State University
System, the University of Connecticut, Charter Oak College, and the Department of Higher
II. This agreement applies only to employees of Higher Education Institutions.
Nothing in this agreement shall affect an employee's eligibility for hazardous duty
retirement participation under SERS.
III. Effective on and after December 31, 2010, once having chosen a plan option, no
employee shall be eligible to change such option unless he or she changes to a position with
the state which does not offer that option to employees, or which offers an option which
was not previously available to the employee. Until such date, an employee may make a
one time irrevocable election of plan options. No past service credit whatsoever will be
available except as may be allowed under paragraph VI, below.
IV. No employee shall be deemed to have chosen "no pension" as the option unless he or
she executes an "irrevocable waiver" in the form provided by the Retirement Services
Division of the Office of the State Comptroller attached to this agreement as Attachment B.
Such waiver shall be deemed inoperative to the extent an employee subsequently attains
employment where "no pension" is not an available plan option. Membership in a plan
shall commence on the first day of the month following attainment of employment which
does not permit "no pension" as an option.
V. Employees who are not members of the ARP and are members of SERS, who become
employed in a higher education institution in a position where SERS is not normally an
option, shall be treated as SERS members for that position.
VI. From the date of this agreement forward, procedures for informing employees of
their plan options and the consequences thereof shall at a minimum meet the standards set
forth in Attachment A to this memorandum. Between the date of this award, and December
31, 2010all ARP members shall be given the one time opportunity to make their irrevocable
choice to either remain in ARP or transfer to SERS. Individuals who choose to transfer to
a. be placed in either Tier II or Tier IIA based upon their last date of hire;
b. receive no credit for any purpose under any provision of SERS for non-purchased
service performed prior to the date of the transfer of plans except as provided in
subsection d and e below;
c. make an irrevocable election not to purchase past service, or to purchase past
service credit in SERS by a direct transfer of his/her entire retirement account in
ARP to SERS; provided however, in no event shall an individual receive credit for
service prior to his/her last date of hire. In the event the cost of such past
service is less than the amount in his/her retirement account, such excess
amount shall remain in his/her ARP account;
d. receive credit for past service based upon their ARP account balance calculated
based upon the full actuarial cost for such purpose determined utilizing charts
provided by the plan actuary.
e. not be allowed to purchase partial past service by reserving some funds in the
ARP account, nor to purchase additional service by the use of funds beyond the
ARP account, unless such purchase is approved by the IRS.
VII. Any employee failing to select a plan option when offered the opportunity to make
such a selection by a higher education institution shall default into a plan as follows:
a. The employee shall first default into the plan to which he or she currently belongs,
b. If there is no such plan, the employee shall default into the default selection for
his/her bargaining unit, which shall be:
i. University of Connecticut
2. UCPEA - SERS
ii. State University
2. SUOAF - AFSCME Local 2836 -- SERS
iii. Community Colleges
1. CCCC -- SERS
3. AFSCME Local 2480 -- SERS
iv. Charter Oak Community College
1. AFSCME Local 1214 SERS
v. Department of Higher Education
1. AFSCME Local 1588 SERS .
VIII. The State will inform the Office of the Comptroller's Retirement and Benefits
Services Division of this Stipulated Award so that the provisions hereof may be
implemented in a timely fashion.
IX. SEBAC hereby agrees to withdraw any and all grievances, prohibited practice
complaints, discrimination (CHRO and EEOC) complaints, lawsuits and any other legal or
administrative actions filed regarding the issue of alleged steering employees to the ARP.
This Stipulated Award resolves all outstanding issues involving this matter.
Attachment A -- Minimum Standards
[The parties will replace with formal language]
A. Employment contract shall reference pension choices and urge employee to
carefully read attached documents to make choice
B. Selection documents should have cover page explaining how employee can get
information from the employer as to choices, and how additional specific materials can be
attained from the Retirement Division. It should explain that employee may also seek
information from the union.
C. Document should carefully explain that choice is irrevocable unless employee takes
different state job where that choice is not an option or a job where a new option is
available. It should give example of part-time employee becoming full-time, remaining
bound by pension choice except as mentioned above.
D. 60 days on payroll should be given prior to default. Default option should be
retroactive if employee tenders any needed contribution. Note: the retroactive of
contributions - usually only retro for SERS - not ARP
E. If no election received after 30 days, additional notice should go to employee from
the employing agency. Higher education institution shall maintain documentation of their
provision of plan option information for confirmation of such, including a copy of signed
and dated letter sent to employee..
Roberta Golick, Arbitrator
Linda J. Yelmini, for the State
Daniel E. Livingston, for SEBAC
Resources for the Transfer Opportunity
SEBAC attorney and chief negotiator Dan Livingston has prepared 2 comprehensive values of questions and answers on the transfer opportunity. Anyone with questions should read through them.
Q&A, Vol. 1
Q&A, Vol. 2
To watch a recording of the UConn information forum with Dan Livingston, click here.
For a better quality and more recent video recording, click on the November 2, 2010 ECSU information forum with Dan Livingston.
To listen to a recording of the CCSU forum with Dan Livingston, click here.
Those considering transferring should familiarize themselves with the details of Tier II (employed before July 1, 1997) and Tier IIA (employed on or after July 1, 1997).
There is a very useful online SERS benefit calculator. It allows calculations that include surviving spouses.
The Division of Retirement of the Comptroller’s office has a website on the transfer opportunity. To access it, click here.
To estimate the cost of purchasing service credits—years employed—in SERS, consult the Cavanaugh Macdonald study. The final cost figures have not been released yet, but the expectation is that they will be close to the Cavanaugh Macdonald estimations.
The SEBAC higher education unions also have transfer opportunity resources on their websites.
SUOAF-AFSCME (State University Organization of Administrative Faculty, CSU, American Federation of State, County and Municipal Employees)
UCPEA-AFT (University of Connecticut Professional Employees Association-American Federation of Teachers)
Council 4-AFSCME (American Federation of State, County and Municipal Employees)
CSU-AAUP (CSU American Association of University Professors)
UHP-AFT (University Health Professionals-American Federation of Teachers, John Dempsey Hospital)
The 4C’s-SEIU (Congress of Connecticut Community Colleges-Service Employees International Union)
UConn AAUP (University of Connecticut American Association of University Professors)
Five Key Myths about ARP and SERS
Myth 1: ARP pays better benefits than SERS.
Reality. This myth, encouraged by the financial services industry, was widely believed twenty years ago. It was based on modeling with built in overly optimistic assumptions about future stock market developments. But it is clear on the basis of thirty years actual experience—as opposed to predictions--that few if any ARP members have been able to accumulate enough to come close to matching SERS pensions. On average, ARP members have been able to obtain less than half of SERS benefits despite contributing over twice as much.
The following table shows the amount of ARP accumulations needed to purchase commercial annuities that match SERS pensions for different final salaries. Note that the costs for females are higher than males. Whereas males and females receive equal SERS pension benefits by law, the commercial annuity market charges women more than men because they live longer on average.
Table. ARP Accumulations Needed to Match SERS Pensions __________________________________________________________________________
Final Salary SERS Pension Needed ARP accumulation
male female __________________________________________________________________________
$30,000 $ 9,975 $178,175 $203,571
$40,000 $13,300 $237,500 $271,429
$50,000 $16,625 $296,875 $339,286
$60,000 $20,600 $374,786 $420,408
$70,000 $25,175 $449,554 $513,776
$80,000 $29,750 $531,250 $607,143
$90,000 $34,325 $612,946 $700,510
$100,000 $38,900 $694,643 $793,878
$125,000 $50,325 $898,661 $1,027,041
$150,000 $61,775 $1,103,125 $1,260,714
Assumptions: 25 years of state service; retirement in 2010; SERS pension for single life with cost of living adjustment; cost to purchase commercial single life annuity at age 65 with equivalent income and cost of living adjustment.
Myth 2: ARP members just have to wait for the stock market to recover. Then their benefits will be equal or superior to SERS benefits.
Reality. Even before the stock market crash of 2008, ARP benefits were dramatically lower than SERS benefits. Even if and when the stock market recovers, ARP members will have lost forever the period of time that their investment values were depressed.
Myth 3: If ARP members switch to SERS and then die, their families will be out of luck.
Reality. Accumulated benefit rights in SERS can be passed on to surviving spouses.
Myth 4: SERS is about to go bankrupt because of a huge unfunded liability.
Reality. Conservative think tanks such as the Cato Institute, the American Enterprise Institute, and the Heritage Foundation are encouraging the belief that public employee pension funds are fiscally unsustainable. They have an ideological opposition to defined benefit retirement systems such as SERS and Social Security. They have disseminated widely through newspapers and other media the findings of studies they sponsored that purport to show that state pension funds and Social Security are teetering on bankruptcy because of unfunded liabilities.
To understand how this is a manipulative disingenuous campaign, we have to look at what an unfunded liability is. Defined benefit plans such as SERS and Social Security have liabilities because their benefits are guaranteed. Defined contribution plans such as ARP do not have liabilities because they have no guaranteed benefits—not because they are fiscally more sound or prudent.
In the past no one worried about the liabilities of defined benefit systems because they operated on pay-as-you-go bases. As long as there were more contributions coming in from active employees than payments going out to retired ones, the systems were fiscally sound. In recent years, there has been concern that such systems have reserves in case contributions decrease. That is a real concern for the private sector where companies could go out of business and leave employees in the lurch.
A fully funded system thus is one that would have enough of a reserve that it could pay all of its guaranteed benefits to retired and active workers if all contributions ceased. That is a worthy long term goal, but it is not a necessity for day to day operations.
Supposedly SERS is funded at 52 percent—it is usually put in the press as “at only 52 percent” as if that portended an imminent crisis, that it only would be able to pay half of its promised benefit amounts. But there is a glass half full way to look at it. SERS has enough of a reserve to cover just over half of its liabilities even if all payments into it were to stop. But unless you believe that the State of Connecticut is about to go out of business, payments into SERS are not going to stop. SERS in short has more than enough to meet its obligations to retirees despite the alarmist claims of the conservatives who what to push everyone into 401(k) type plans such as ARP.
Still another way to look at this is that it is said that in the history of the United States, no state pension fund has ever failed to meet its obligations to retirees.
The latest salvo in the anti-state worker campaign is the claim that SERS will run out of money by 2019. For the response of SEBAC, click here.
See also, Q&A’s 11, 19, 20, and 39 in vol. 2 of the SEBAC Q&A.
Myth 5: SERS costs the state much more than ARP. That is why SERS benefits are higher and unsustainable.
Reality. The normal operating costs of SERS are lower than those of ARP. The reason why ARP benefits are lower is because the financial services industry drains management fees, commissions, and profits from the accounts; and defined contribution plans such as ARP do not have the advantages of risk pooling that defined benefit plans such as SERS have. In general defined contribution plans require about twice as much contributions as defined benefit plans to deliver the same benefits.
See Q&A 11 in vol. 2 of the SEBAC Q&A