What is it?
Introduction
About 14 million state and local government workers are covered by a retirement system. About 95 percent of the participating employees are in defined benefit plans. These plans vary from state to state, but in general they promise employees specific retirement benefits based on age, years of service, and salary level. The broad term used to describe these plans is PERS, which stands for the Public Employees’ Retirement System. However, the plans of some states go by different names. For instance, Arizona’s system is called the Arizona State Retirement System (SRS), while Georgia’s is known as the Employees’ Retirement System of Georgia (ERS).
How does a defined benefit plan under PERS work?
Public plans under PERS typically require an employee to contribute to his or her retirement plan. The average contribution for all states is 6 percent, although many require the employee to contribute less than 5 percent. A few plans require no employee contribution. In most states, the state contribution is more (sometimes substantially more) than the employee’s contribution. Many states have structured their plans in such a manner to comply with federal tax laws that allow the state to pay the employee’s contribution or let employees make contributions on a tax-sheltered basis. After a certain number of years, the employee is vested and will someday be eligible to receive a pension benefit even if at the time of retirement he or she no longer works in covered employment. See the following sections for more information.
Where can a state or local employee go for more information
Because state and local PERS plans are not currently uniform, plan benefits and eligibility requirements vary widely. This discussion is intended only to highlight common provisions of state and local PERS plans, not to provide specific state-by-state information. A PERS employee should consult his or her benefit handbook and employer for more information. However, some states have also established Internet sites where participants can learn about their state PERS system.
Eligibility rules under a Public Employees Retirement System (PERS) plan
Who can participate in a PERS plan?
Employees of state and local governments include a wide range of occupations (such as government administrators and elected officials, as well as firefighters, police, and teachers). Most participate in a PERS plan. A study showed that 96 percent of full-time state and government employees participated in a retirement plan, while 58 percent of part-time employees participated. However, a state may have more than one plan. Some plans, for instance, cover only one type of occupation, such as teachers, and some municipal employees have their own plans.
When is a covered employee eligible for retirement benefits?
Employees covered under PERS can retire and begin receiving full benefits after a certain age and after a certain number years of service. In most states, normal retirement age is considered to be between ages 60 and 65, as long as the retiree has between 5 and 10 years of service. The majority of plans also allow full benefits to be received at age 55, as long as the employee has 30 years of service. However, some plans require employees to have as few as 20 years of service or as many as 35 years of service to receive full benefits at age 55. Early retirement is permitted by most PERS plans, but the retiree will receive a reduced benefit. Early retirement in most plans is permitted at age 55 or, to a lesser extent, at age 50 (often for individuals in hazardous occupations) with fewer years of service needed than for normal retirement.
Tip: Rules regarding PERS benefits may vary even within a state if the state has set up tiers of coverage for its PERS employees. Tiers are usually based on when the employee was hired. Employees in Tier I, for instance, may receive different benefits under different eligibility rules than employees in Tier II due to changes in state law. Or, employees in Tier I may not be subject to a Social Security offset, whereas employees in Tier II may be.
When is a covered employee vested in his or her pension benefits?
About 55 percent of PERS now require an employee to work in covered employment for 5 years or less in order to be vested. However, almost 40 percent still require an employee to work 10 years or more in order to become vested.
Benefits typically available to employees covered by a PERS plan
Retirement benefits
A state or local government employee under PERS receives a retirement benefit based on his or her age at retirement, years of service, and annual salary. Although states calculate the benefit differently, many states multiply together a percentage factor (such as 2 percent), the years of service an employee has, and an average pay amount (based on the highest three years of pay or the last year of pay the employee received). Many employees are also eligible to participate in a Section 457 nonqualified deferred compensation plan. Employees shelter part of their salaries from current income taxes by investing the money in an investment account that grows tax free until the money is withdrawn as a result of separation from service, an emergency, or, in most cases, retirement.
Disability benefits
Disability benefits may be paid to PERS employees for life or until the employee is no longer disabled. The disability may or may not be job related. State systems may require that the employee meet certain length-of-service requirements and be disabled for a certain period (six months, for instance) before receiving benefits. For specific information, check with the plan administrator.
Survivor’s and death benefits
In many cases, retirees can elect to receive a reduced retirement annuity in order to provide a survivor’s annuity to their spouse. Or, the retiree may opt to have a lump sum paid to his or her survivor as long as the retiree has not outlived his or her benefit.
Health care coverage
Most full-time PERS employees are covered by a health care plan similar to medical care offered in the private sector, such as HMOs and PPOs, among other options.
Other benefits
A few states offer other benefits to their employees. For instance, employees covered by the California Public Employees’ Retirement System (CalPERS) are eligible for home loans and long-term care benefits.
PERS and Social Security
Many public employees are covered by Social Security
Social Security coverage for PERS employees varies widely. A study by the Public Retirement Institute found that 68 percent of all active employees are covered by Social Security, and this coverage is usually mandatory. PERS employees who aren’t covered are usually firefighters, police, or other safety personnel. Teachers are often covered under a separate plan and may participate in a program designed to be a private alternative to Social Security, such as the Teacher’s Insurance and Annuity Association–College Retirement Equities Fund (TIAA-CREF).
Most public pension plans are not integrated with Social Security
Integration with Social Security means that benefits you receive from a PERS plan are designed to coordinate with Social Security benefits and perhaps provide a lesser PERS benefit to you as a result. A study by the Wisconsin Retirement Research Committee (RRC) found that 60 out of 68 PERS plans with Social Security coverage were not integrated with Social Security. However, this doesn’t mean that Social Security benefits you receive won’t be reduced because you receive PERS benefits. In some cases, your Social Security benefit will be reduced by the windfall elimination provision.
Tax considerations
Retirement benefits under a PERS plan may be subject to federal income tax. However, how much of the benefit is taxable depends on whether the employee made contributions to the defined benefit plan and whether the contributions were made with pretax or after-tax dollars. State systems generally use the IRS’s simplified general rule to calculate the tax-free portion of the benefit. Money withdrawn from a Section 457 plan is taxed in accordance with the rules governing these plans. For specific information on federal taxation of defined benefit plans and general information on taxation of Section 457 plans, see IRS Publication 575, Pension and Annuity Income. PERS retirement benefits may also be taxable at the state level. Contact your state’s department of taxation for information.
Future changes likely for PERS
A debate currently rages over the future of PERS plans in many states. Opponents of the current defined benefit plan based systems argue that to appeal to younger workers and remain responsive to the needs of state and local employees, PERS should become largely a defined contribution plan similar to the popular 401(k) plan. Proponents of the current system argue that the life annuity provided by a defined benefit plan will protect the retirement income of participants better than a defined contribution plan. In the middle are advocates of hybrid plans that offer both an annuity and a chance to contribute to a supplemental income account.
The outcome of the debate will likely be that more and more PERS will become hybrids or defined contribution plans. In addition, it’s possible that the normal retirement age for PERS participants will increase due to the planned increase in the normal Social Security retirement age (to age 67 by 2027). Currently, however, only a few plans are increasing their normal retirement age to correspond with Social Security. In addition, newly hired PERS employees may someday be required to participate in Social Security if proposed legislation is enacted.