Public Plans' Number of Retirees Growing Faster than Active Participants

December 24, 2009 (PLANSPONSOR.com) – A new report indicates that for public retirement systems, the number of retirees is growing at a faster rate than is the number of active employees.

The Wisconsin Legislative Council’s 2008 Comparative Study of Major Public Employee Retirement Systems shows a continued growth in the total number of participants in the plans surveyed, but declining ratios of active to retired participants. The average ratio of active employees to retired employees in the 87 systems surveyed is 2.

Forty-seven of the systems had an active employees to retired employees ratio of less than two, while in the 2000 report, 17 of the systems had an active employees to retired employees ratio of less than two.

This could be due, in part, to the fact that the 2008 Report indicates the return to a trend noted in previous reports that permits retirement at earlier ages. Between the 2000 and 2004 reports, 10 plans reduced their early retirement provisions by reducing the minimum age or the number of years of service required, or both. Between the 2004 and 2006 reports, only two plans did so, but between the 2006 and 2008 reports, an additional eight plans reduced their early retirement provisions.

Seventy-five of the 87 plans covered in the 2008 report permit “early retirement” before the normal age and service requirements of the plans have been met. Fifty-four of the 87 plans allow early retirement at a minimum age of 55 or more, and thirteen allow early retirement at a minimum age of less than 55.

While the number of retirees is growing, funding ratios are declining. According to the study, funding ratios of more than 100% have decreased substantially since the 2000 Report. Thirty-three plans had funding ratios in excess of 100% in 2000, but only 10 plans had funding ratios in excess of 100% in 2008. However, 33% of the plans studied had funding ratios of 90% or more in 2008. The average funding ratio in 2008 was 81%.

Nineteen plans had funding ratios between 90% and 100% in 2008, compared to 21 plans in 2006, and 18 plans had funded ratios between 80% and 90% in the most recent report, compared to 20 plans in the prior analysis.

Contributions and Benefits Calculations

The Wisconsin Legislative Council's 2008 Comparative Study of Major Public Employee Retirement Systems shows employee contribution rates were increased between 2006 and 2008 in 17 of the 87 public plans studied. Employer contribution rates increased for 32 plans between 2006 and 2008. The report said there were a significant number of rates that decreased between 2006 and 2008; however, it noted that the majority of these decreases were due to the adjustment of rates to the normal cost or statutory rates from prior rates that included actuarial liabilities.

In 2008, a total of 64 plans, or 73.6% of the 87 plans in the report, require five or less years of service to vest. This is an increase of one plan since the 2006 report and nine plans since the 2000 report. The number of plans in 2008 that require 10 years of service to vest has decreased by eight plans from the 2000 report and by 23 plans from the 1990 report.

Among the 87 plans in the report, 83 are defined benefit plans in which an employee's retirement benefits are generally calculated by multiplying the employee's number of years of service times a “formula multiplier” and multiplying the product of this calculation by the employee's final average salary. The report indicates that employees of 17 of the 87 plans are not covered by Social Security, and those plans frequently have a higher formula multiplier to compensate for the lack of Social Security coverage. The 17 plans in which employees are not covered by Social Security have formula multipliers ranging between 2% and 3.3% for each year of service. The average formula multiplier for these 17 plans is approximately 2.3% for each year of service.

Since the 2006 report, there has been little change in how any of the plans calculate final average salary. The most common method is to use a three-year average, which may be required to be consecutive years or may be required to be years that fall within a given period. Fifty-five of the 87 plans in the report use a three-year final average salary. The next most prevalent calculation of final average salary is a five-year period -- used by 18 of the plans in 2008.

The trend noted in previous comparisons to increase formula multipliers has noticeably slowed, the report said. Four of the 87 plans increased their formula multipliers between 2006 and 2008, compared to thirty-two of 85 plans that increased their formula multipliers between 1996 and 2000. Little change has been noted regarding how final average salary is computed or in the number of plans that cap retirement benefits.

The majority of plans surveyed in the report impose no maximum benefit limitation, followed by those with a limit of 100% of final average salary.

Most of the plans in the report have adopted provisions in which retirement annuities are annually increased, either by a set percentage or in response to changes in the consumer price index (CPI).

The study compares significant features of 87 major state and local public employee retirement systems in the United States, including at least one statewide plan from each state.

The report is here.

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