Buy back service time on pension

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Rogue1
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Buy back service time on pension

Post by Rogue1 » Fri Aug 10, 2018 6:19 pm

HI everyone,

My question is about whether it’s financial worthwhile to buy back service time on my pension. Any guidance you could offer would be greatly appreciated.

Here’s the background--
I work for the County. Here’s how much it would cost me to buy back service time from the County (it’s broken down in chunks because I’ve previously worked for different public employers, and the cost to buyback is different for each one):
To buy back 1.04 years (from my time at public entity #1) = $20,248.
To buy back an additional 1.87 years (from my time at public entity #2) = $33,016
To buy back an additional .283 years (from my time at public entity #3) = $5,379.
So, if I purchased ALL of that time, the total cost would be $58,643 to get an extra 3.19 yrs of service credit added to my pensionable service time. In other words, that's what it would cost to add that extra time to the number of years that count towards my County pension.

County employees vest at 5 years. I’ve worked for the County only about 3 years so far, and I plan to work there a minimum of 5 years. That means if I buy back all of the time and only work for the County for 5 years, my pensionable time would be roughly 8 years (5 + the 3 years I purchased).

Under the County pension plan, vested and retired employees get a percentage of their former final monthly salary for life. That percentage depends on their retirement age—i.e., the age at which they put in to start getting their pension. I max out at 2.5% at age 67. In other words, if I make $9,500/month when I leave the County, and I retire at age 67 having worked for the County for 5 years, then my pension would be: 9500 x 2.5% x 5 = $1187.5 a month.

Again, 2.5% is the maximum, and for that you have to wait until age 67 to put in for retirement. I don’t yet know exactly when I’ll put in for retirement, so here are the other figures:

If I retire at age 52, I get 1% of my monthly salary (times years of service)
If I retire at age 55, I get 1.3% of my monthly salary (times years of service)
If I retire at age 57, I get 1.5% of my monthly salary (times years of service)
If I retire at age 60, I get 1.8% of my monthly salary (times years of service)
If I retire at age 62, I get 2% of my monthly salary (times years of service)
If I retire at age 65, I get 2.3% of my monthly salary (times years of service)
If I retire at age 67, I get 2.5% of my monthly salary (times years of service).

Now let’s run some hypotheticals. Let’s say I made $10,500 a month when I left the County (this is probably minimum what I’d be making) and only worked for 5 years total for the County--if I did NOT buy back the service time, here’s what my pension would look like:

…if I retired at age 55 = $682
…if I retired at age 60 = $942
…if I retired at age 62 = $1050
…if I retired at age 65 = $1207
…if I retired at age 67 = $1312

Under that same scenario, If I DID buy back ALL the service time, here’s what my pension would look like:

…if I retired at age 55 = $1119
…if I retired at age 60 = $1549
…if I retired at age 62 = $1722
…if I retired at age 65 = $1980
…if I retired at age 67 = $2152
Again, my cost for this much-improved scenario #2 would be $58,643 paid to the County right now (well, not technically right now—it would come out of my County check and be spread out through the year).

Also, the reality is, I don’t know how long I’ll work for the County. I might try out something else after 5 years, or maybe I’ll stay with the County another 15 years. But I want to buy the time back now so that I can pay for it out of my pre-tax salary and thus lower my tax payments. For this reason, I’d like to decide soon.

Here’s a few other important considerations:

The pension plan includes a yearly cost of living adjustment (which will vary) for the rest of my life.
It also has decent survivor benefits, so the money I paid in would never go to waste, even worst case scenario.
Also, if for some reason I don’t reach 5 years with the county—let’s say I got fired or decided to work elsewhere—I would get get 5% yearly interest guaranteed for any amount already in my pension—including any service time I’d already paid for. Given the way the stock market is looking (overvalued, etc.), it seems that buying back the service time is a good use of my money in terms of opportunity costs. Also, my mortgage is 3.62%, so I’m better off buying the time than, say, trying to pay off my $250,000 mortgage early, right?

Let me know what you think or if you need any additional information. Thanks for reading and for your help on this issue.
Last edited by Rogue1 on Fri Aug 10, 2018 10:09 pm, edited 1 time in total.

Madbull
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Re: Buy back service time on pension

Post by Madbull » Fri Aug 10, 2018 9:55 pm

Buyback dilemmas, ugh. (I wish my County would offer a buyback....I left after 4 years to go to the City before realizing the grass isn’t always greener and went right back to the County. After just 5 weeks, lol. I stupidly cashed out when I did). At least when I returned they just adjusted my in-service date, but I lost those first 4 years of compounding growth potential. :-( Alas, 18.5 down and 8.5 to go, woot.

The good number crunchers will comment and I’ll leave that to them. The one bit I’d toss in though is to think about this:

What is the funding level of your pension plan? The issue with DB plans that use the ‘x percent of final months/years salary’ is how they expect to pay for what are usually higher amounts based on the end of your career, which doesn’t tend to always reflect you/your employers actual contributions and growth to keep it sustainable all the time. (Unlike most DC plans where it’s based on you & your employers actual deposits throughout your entire career).

I think you should look at that and find a way to weight that in your decision somehow.

Rogue1
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Re: Buy back service time on pension

Post by Rogue1 » Fri Aug 10, 2018 10:08 pm

Good point! I just looked it up. As of 2016, it was 70% funded. I guess that's not ideal.

trueblueky
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Re: Buy back service time on pension

Post by trueblueky » Fri Aug 10, 2018 10:12 pm

If you leave service in 2020 and start the pension in 2040, how is inflation over those twenty years accounted for?

Iridium
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Re: Buy back service time on pension

Post by Iridium » Fri Aug 10, 2018 10:26 pm

OP, what is your age? The 'deal' varies dramatically depending on your age. Also, when does inflation adjustment start kicking in? When you leave the job? When you start taking payments? Now?

Out of curiosity, what happens if you wait to do buy back? Does the price increase? What prevents you from making the contribution pretax in the future?

Rogue1
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Re: Buy back service time on pension

Post by Rogue1 » Fri Aug 10, 2018 10:42 pm

I'm 42. I can buy the service pretax in the future, but just not sure how long I'll be there. I suppose I could wait longer, but the cost definitely does go up (for example, to buy back .283 years went up by $384 in one year).

I thought the buyback could be a good investment to make now given that my husband and I already max out our 403bs and 457s, and I'm not feeling great about pumping more money in our taxable stock market accounts (all Vanguard index) right now because the stock market seems overvalued.

What's the advantage to waiting longer to do the back? And can you explain how inflation factors in? Is the issue that the spending power of the amounts I'm quoting won't go very far in, e.g., 20 years?

If I were to invest that same amount, $58,643, in the market (taxable accounts) and assuming a 5% return over, say, 13 years (i.e., when I'm 55), I'd have $96,700. Not bad, but spread this amount over 30 years, I think I'm still better off with the guaranteed pension, no?

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sergeant
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Re: Buy back service time on pension

Post by sergeant » Fri Aug 10, 2018 10:42 pm

In every single question on buying time in public pensions on this site it is a no-brainer to do the purchase. Retirement boards have made it less lucrative over the past few years but it is still the way to go.

70% funding isn't great for sure and would give me some concern. What is your current age? Why are you already planning to leave? You are correct in that it is a good way to lower taxable compensation when making a purchase of time.
Lincoln 3 EOW!

Rogue1
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Re: Buy back service time on pension

Post by Rogue1 » Fri Aug 10, 2018 11:01 pm

I'm not sure if I will leave, I just want to keep my options open. I love my job, but if there are growth opportunities down the line, I like to tell myself I'd be able to pursue them.
We are otherwise doing OK in terms of other retirement funds:
-Partner has a pension that'll pay out at least 5k/month,
-1.5 million in retirement savings so far,
-80k in our preschooler's college fund so far (add about 2,500/year; will buy at greater rate if stocks tank);
-plan to continue saving $100k per year in retirement accounts for the next 9 years or so.

I'm basically looking for another good investment option. In other words, I think we can take a little bit of risk in terms of the pension--but we don't want to be dumb about it either. What do you all think?

Iridium
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Re: Buy back service time on pension

Post by Iridium » Sat Aug 11, 2018 12:31 am

Rogue1 wrote:
Fri Aug 10, 2018 10:42 pm
What's the advantage to waiting longer to do the back? And can you explain how inflation factors in? Is the issue that the spending power of the amounts I'm quoting won't go very far in, e.g., 20 years?

If I were to invest that same amount, $58,643, in the market (taxable accounts) and assuming a 5% return over, say, 13 years (i.e., when I'm 55), I'd have $96,700. Not bad, but spread this amount over 30 years, I think I'm still better off with the guaranteed pension, no?
Re: inflation adjustment, was just trying to better understand what your benefit would actually be. Whether it is simply percentage of last month's pay, or whether they would give you a bit extra for inflation between when you leave and when you actually take the pension.

If you took it at 55, the buy back will make you $5241 a year. Versus having $96,700. It is a close call. Given that you would be able to open up additional tax advantaged space and the possibility you'll leave with a monthly salary better than $10,500, I would probably be tempted to buy.

carolinaman
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Re: Buy back service time on pension

Post by carolinaman » Sat Aug 11, 2018 8:48 am

If you invest the $58k for 13 years at 5% return, it = $110k. Assume a 4% withdrawal is $4,400 per year. Age age 55, $5,244. A small advantage to buyback. Later retirements are even better.

I am not sure how you determined salary. If you are using current salary for retirement 15 to 20 years later, you are likely understating final retirement and calculations are a mix of current and future values.

Many pension funds allow you to use 401k/457 funds for the buyback. If you have that option, you should take it rather than use after tax dollars.

Additional seniority also often gives one added benefits, such as more vacation. I did buyback of 5 years and it gained me more vacation and more longevity pay.

However, unless you plan to stay with county until retirement age, I would not do the buyback. Pensions are usually based on the highest X years of salary. Assuming a steady salary growth due to inflation and other factors, your salary should be much higher in 15 years, giving you a much higher pension. If you have 5 years now and start taking the retirement 15 years based only on that, the value is much less.

Rogue1
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Re: Buy back service time on pension

Post by Rogue1 » Sat Aug 11, 2018 11:15 am

You all are brilliant! It seems you've identified the main problem. If I were to go ahead with the buy back, then decide to leave the County after only 5 years, deferring County retirement for, say 10-20 years, the dollar figures I'm citing and relying on could look pretty meager. Indeed, my salary will be "frozen" at whatever it was when I left the County--and the other variables would likely remain static too. The formula the County uses to calculate the pension is: "2.5 x age at retirement x service credit [i.e., County time] x final monthly average salary = gross monthly benefit amount." My guess is that the County does NOT consider inflation or apply cost of living increases while retirement funds are in deferred status.

The County website says the following about deferring retirement: "If you have not reached minimum retirement age [which is 52], your retirement will be automatically deferred or postponed. You may retire when you meet the minimum age and service requirements. Your contributions will remain on deposit and continue to earn interest." Interest is 2.5% twice a year. But it seems the interest accrued would not in any way impact the amount I would get after retirement--the interest would only affect how much money I'd get back if I were to yank the funds and never put in for retirement.

Ugh. So I need to call the County Pension people and make sure my understanding above is correct. If it is, then I'll have to reconsider everything -- maybe in that scenerio it wouldn't be financially worthwhile to leave the County after only two more years to follow my dreams. That certainly complicates things.

Do you all agree with my assessment?

By the way, the poster below wrote: "I am not sure how you determined salary. If you are using current salary for retirement 15 to 20 years later, you are likely understating final retirement and calculations are a mix of current and future values." I based my final salary on what it will be in two years if I were to leave the County at that time. You are all correct that my salary would certainly be higher if I stayed longer.

I think we're all agreed that the buyback is a good idea if I remain with the County for the rest of my career, right? The problem only arises if I were to leave early---in which case is it a definite no?

Madbull
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Re: Buy back service time on pension

Post by Madbull » Sat Aug 11, 2018 11:44 am

Rogue1 wrote:
Sat Aug 11, 2018 11:15 am
.....Ugh. So I need to call the County Pension people....
Definitely call or visit with them. They ‘should’ be willing to run multiple comps and scenarios for you, that’s part of their job. I call and have fresh estimates done every year. Not so much for my pension benefit, (our online estimator is fairly accurate and allows for numerous options), but for the spousal benefit if I die prior to retirement eligibility in various years. They never bat an eye and are always helpful.

Rogue1
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Re: Buy back service time on pension

Post by Rogue1 » Sat Aug 11, 2018 11:57 am

Thanks Madbull. My Pension people aren't always very helpful, but I'll give it a try.

Here's a another thought. We are in the 24% tax bracket. The $58,643 cost to buy back the service time would come out of my paycheck pre-tax. So doesn't that mean that on $58,643, it's a $14,074 savings that would have gone to the government anyway (58643x.24)? In other words, the true cost for the buyback is $44,569 (58642 - 14074). I know very little about taxes, but am I getting that right?

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sergeant
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Re: Buy back service time on pension

Post by sergeant » Sat Aug 11, 2018 12:45 pm

Rogue1 wrote:
Sat Aug 11, 2018 11:57 am
Thanks Madbull. My Pension people aren't always very helpful, but I'll give it a try.

Here's a another thought. We are in the 24% tax bracket. The $58,643 cost to buy back the service time would come out of my paycheck pre-tax. So doesn't that mean that on $58,643, it's a $14,074 savings that would have gone to the government anyway (58643x.24)? In other words, the true cost for the buyback is $44,569 (58642 - 14074). I know very little about taxes, but am I getting that right?
Yes, it's right, but remember that you will pay income tax on the pension benefit but who knows at what rate that might be. Based on your two pensions, and large deferral amounts it could be in the same bracket. I also looked back at your pension's funding level of 70% in 2016. I bet it is closer to 75% now with two solid years of returns. So less of a worry if the funding level continues to improve.

The numbers say do the buyback. It is more beneficial the longer you stay but still is worthwhile if you leave sooner. Check what an immediate annuity would pay for the buyback amount with different ages. You will see the pension is better AND has a COLA.
Lincoln 3 EOW!

Rogue1
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Re: Buy back service time on pension

Post by Rogue1 » Sat Aug 11, 2018 1:55 pm

Oh my gosh, if I'm doing this right, based on the cost of comparable annuities, the pension is a no brainer!

If I were to retire at age 55 and pay $58k for annuity now, I'd only get $406 monthly with no death benefit (according to this site https://www.immediateannuities.com/info ... tep-1.html).

I think I'm going to go for the buyback. If there's anything else I should consider, please let me know. Thanks everyone, I truly appreciate your feedback and input.

Good Listener
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Re: Buy back service time on pension

Post by Good Listener » Sat Aug 11, 2018 2:46 pm

I always ask why is this offer being made? To me (a person who never worked in the public sector), it reminds me of the longstanding statement that public employees get paid less salary (I'm not sure if its true anymore) in exchange for a better pension. Why? Well I figure it provides a secure feeling for the employee, but for the municipality it allows lower spending now in exchange for deferred obligations. In my state of NJ now, we are in a devastating situation of underfunding and it is literally certain that cuts will be made to the pensions, the only question being how much. So I would want to know the finances and percent funding of the system that was offering me the deal. My instinct would be not to take it unless I was certain of a well funded situation. Good luck.

Carl53
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Re: Buy back service time on pension

Post by Carl53 » Sat Aug 11, 2018 5:23 pm

Does the employee also have social security being withheld? Particularly if not, have they had other work history with it being withheld. Also, what is your partner's work history with regard to public pension vs SS withholding. I'm not overly knowledgeable about them but the Windfall Elimination Provision? and Government Pension Offset provisions may impact the value of your additional time being bought back.

Rogue1
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Re: Buy back service time on pension

Post by Rogue1 » Sat Aug 11, 2018 5:32 pm

Carl53: No social security gets taken out of my salary. Sadly, due to the "Windfall Elimination" law, I don't think I'll be getting social security--even though I've contributed significantly over the years. :( Many years I even maxed out what you can pay into social security due to my (former) high salary in the private sector.

Good Listener: Regarding the possibility of an underfunded pension, I'm not excessively worried about it. Yes, it's a risk, no doubt about it. But while private companies that offer underfunded pensions go bankrupt, disappear, and don't necessarily make good on the pension, I think public employers usually find other ways to cut corners so that they meet their pension obligations--for example, they raise the cost of services, offer the new employees worse benefits, etc. It's not like my public employer is going anywhere; the citizenry is always going to need some level of County services. I just can't imagine the outrage if they tried to default. I know it's a risk, but so is any investment.

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iceport
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Re: Buy back service time on pension

Post by iceport » Sat Aug 11, 2018 5:53 pm

Rogue1 wrote:
Sat Aug 11, 2018 5:32 pm
Good Listener: Regarding the possibility of an underfunded pension, I'm not excessively worried about it. Yes, it's a risk, no doubt about it. But while private companies that offer underfunded pensions go bankrupt, disappear, and don't necessarily make good on the pension, I think public employers usually find other ways to cut corners so that they meet their pension obligations--for example, they raise the cost of services, offer the new employees worse benefits, etc. It's not like my public employer is going anywhere; the citizenry is always going to need some level of County services. I just can't imagine the outrage if they tried to default. I know it's a risk, but so is any investment.
Public sector pension cuts have been done. My (early retirement) state pension was cut by ~20% 6 years before I was eligible. COLAs were also slashed. It does happen. Certain accrued benefits are locked in once earned, but not things like early retirement treatments and COLAs.

That being said, a 70% funded ratio is nowhere near the danger zone, in my opinion. (My state pension fund stood at 36% funded last time I checked. :shock: )
"Discipline matters more than allocation.” ─William Bernstein

Grt2bOutdoors
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Re: Buy back service time on pension

Post by Grt2bOutdoors » Sat Aug 11, 2018 6:36 pm

iceport wrote:
Sat Aug 11, 2018 5:53 pm
Rogue1 wrote:
Sat Aug 11, 2018 5:32 pm
Good Listener: Regarding the possibility of an underfunded pension, I'm not excessively worried about it. Yes, it's a risk, no doubt about it. But while private companies that offer underfunded pensions go bankrupt, disappear, and don't necessarily make good on the pension, I think public employers usually find other ways to cut corners so that they meet their pension obligations--for example, they raise the cost of services, offer the new employees worse benefits, etc. It's not like my public employer is going anywhere; the citizenry is always going to need some level of County services. I just can't imagine the outrage if they tried to default. I know it's a risk, but so is any investment.
Public sector pension cuts have been done. My (early retirement) state pension was cut by ~20% 6 years before I was eligible. COLAs were also slashed. It does happen. Certain accrued benefits are locked in once earned, but not things like early retirement treatments and COLAs.

That being said, a 70% funded ratio is nowhere near the danger zone, in my opinion. (My state pension fund stood at 36% funded last time I checked. :shock: )
The biggest risk to any person expecting a pension; is not how much the pension's currently funded percentage is, rather it's what is the pension's funding rate at the time you have begun taking payments and your age. Pensions where there is drastic underfunding will usually cut benefits to those who are under a certain age (say 70) and where funding is under 50% with no near term turnaround in sight. Look at what is happening with multi-employer pension funds right now, that is what you could reasonably expect to occur if the underfunding gets to that level.

I agree that 70% funded ratio is not the danger zone, there are many private sector workers who's own personal savings are at or below that figure, they are still retiring and many are doing okay.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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iceport
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Re: Buy back service time on pension

Post by iceport » Sat Aug 11, 2018 6:42 pm

Grt2bOutdoors wrote:
Sat Aug 11, 2018 6:36 pm
iceport wrote:
Sat Aug 11, 2018 5:53 pm
Rogue1 wrote:
Sat Aug 11, 2018 5:32 pm
Good Listener: Regarding the possibility of an underfunded pension, I'm not excessively worried about it. Yes, it's a risk, no doubt about it. But while private companies that offer underfunded pensions go bankrupt, disappear, and don't necessarily make good on the pension, I think public employers usually find other ways to cut corners so that they meet their pension obligations--for example, they raise the cost of services, offer the new employees worse benefits, etc. It's not like my public employer is going anywhere; the citizenry is always going to need some level of County services. I just can't imagine the outrage if they tried to default. I know it's a risk, but so is any investment.
Public sector pension cuts have been done. My (early retirement) state pension was cut by ~20% 6 years before I was eligible. COLAs were also slashed. It does happen. Certain accrued benefits are locked in once earned, but not things like early retirement treatments and COLAs.

That being said, a 70% funded ratio is nowhere near the danger zone, in my opinion. (My state pension fund stood at 36% funded last time I checked. :shock: )
The biggest risk to any person expecting a pension; is not how much the pension's currently funded percentage is, rather it's what is the pension's funding rate at the time you have begun taking payments and your age. Pensions where there is drastic underfunding will usually cut benefits to those who are under a certain age (say 70) and where funding is under 50% with no near term turnaround in sight. Look at what is happening with multi-employer pension funds right now, that is what you could reasonably expect to occur if the underfunding gets to that level.

I agree that 70% funded ratio is not the danger zone, there are many private sector workers who's own personal savings are at or below that figure, they are still retiring and many are doing okay.
I don't think it works the same way for public pensions. In general, once a retiree starts receiving public pension benefits, they are far, far better protected legally than before benefits start. Laws vary by state, and all bets are off with municipalities, which have the option of bankruptcy. Can counties go bankrupt?
"Discipline matters more than allocation.” ─William Bernstein

Rogue1
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Re: Buy back service time on pension

Post by Rogue1 » Sat Aug 11, 2018 6:45 pm

Orange County--one of the wealthiest counties--went bankrupt in 1994.

Grt2bOutdoors
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Re: Buy back service time on pension

Post by Grt2bOutdoors » Sat Aug 11, 2018 7:44 pm

Rogue1 wrote:
Sat Aug 11, 2018 6:45 pm
Orange County--one of the wealthiest counties--went bankrupt in 1994.
That's because they thought they understood how derivatives work :oops: and :oops: :oops: they leveraged their investments to boot!
http://fortune.com/2012/11/21/the-culpr ... ge-county/
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

TheDDC
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Re: Buy back service time on pension

Post by TheDDC » Sat Aug 11, 2018 9:12 pm

iceport wrote:
Sat Aug 11, 2018 6:42 pm
Grt2bOutdoors wrote:
Sat Aug 11, 2018 6:36 pm
iceport wrote:
Sat Aug 11, 2018 5:53 pm
Rogue1 wrote:
Sat Aug 11, 2018 5:32 pm
Good Listener: Regarding the possibility of an underfunded pension, I'm not excessively worried about it. Yes, it's a risk, no doubt about it. But while private companies that offer underfunded pensions go bankrupt, disappear, and don't necessarily make good on the pension, I think public employers usually find other ways to cut corners so that they meet their pension obligations--for example, they raise the cost of services, offer the new employees worse benefits, etc. It's not like my public employer is going anywhere; the citizenry is always going to need some level of County services. I just can't imagine the outrage if they tried to default. I know it's a risk, but so is any investment.
Public sector pension cuts have been done. My (early retirement) state pension was cut by ~20% 6 years before I was eligible. COLAs were also slashed. It does happen. Certain accrued benefits are locked in once earned, but not things like early retirement treatments and COLAs.

That being said, a 70% funded ratio is nowhere near the danger zone, in my opinion. (My state pension fund stood at 36% funded last time I checked. :shock: )
The biggest risk to any person expecting a pension; is not how much the pension's currently funded percentage is, rather it's what is the pension's funding rate at the time you have begun taking payments and your age. Pensions where there is drastic underfunding will usually cut benefits to those who are under a certain age (say 70) and where funding is under 50% with no near term turnaround in sight. Look at what is happening with multi-employer pension funds right now, that is what you could reasonably expect to occur if the underfunding gets to that level.

I agree that 70% funded ratio is not the danger zone, there are many private sector workers who's own personal savings are at or below that figure, they are still retiring and many are doing okay.
I don't think it works the same way for public pensions. In general, once a retiree starts receiving public pension benefits, they are far, far better protected legally than before benefits start. Laws vary by state, and all bets are off with municipalities, which have the option of bankruptcy. Can counties go bankrupt?
State pensions are treated as contractual property in courts. Essentially the deferred benefit terms agreed to during state employment are protected as property owned by the employee. I am not sure if these consistent rulings regarding state mentions also translate into county/municipal as well but I would think so. Funding level is generally irrelevant as government finds a way to fund or borrow to pay obligations. In my home state the pension changes that occur were only allowed to be applied to new hires. COLAs for current workers are benefits that were not earned/promised (since they are not retirees yet), so there could be a likely possibility that those could be cut in your state/county in my judgement. My home state has never had a COLA for the pension plans and we are the better for it financially.

I would buy those service years if you are sure you want to stay in the county system for employment. If you are, it would be silly not to. I bought back a year under the state pension system and I definitely don't regret it.

-TheDDC

Rogue1
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Re: Buy back service time on pension

Post by Rogue1 » Sun Aug 12, 2018 11:06 am

[/quote]

I would buy those service years if you are sure you want to stay in the county system for employment. If you are, it would be silly not to. I bought back a year under the state pension system and I definitely don't regret it.

-TheDDC
[/quote]


That's the easier call. The harder call is whether I should buy in if I don't know for certain whether I'll be staying, and want to keep options open--that's the one I'm trying to figure out.

Dead Man Walking
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Re: Buy back service time on pension

Post by Dead Man Walking » Sun Aug 12, 2018 2:57 pm

Rogue1 wrote:
Sun Aug 12, 2018 11:06 am
I would buy those service years if you are sure you want to stay in the county system for employment. If you are, it would be silly not to. I bought back a year under the state pension system and I definitely don't regret it.

-TheDDC
[/quote]


That's the easier call. The harder call is whether I should buy in if I don't know for certain whether I'll be staying, and want to keep options open--that's the one I'm trying to figure out.
[/quote]

A consideration beyond the retirement benefit is the disability benefit. I had a friend who was vested in a state teachers retirement plan. He was in a horrific automobile accident and was permanently disabled. The disability benefit was 75% of his salary until he was eligible for retirement benefits. I don't know if your plan has this type of disability benefit.

DMW

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Re: Buy back service time on pension

Post by TheDDC » Sun Aug 12, 2018 3:31 pm

Dead Man Walking wrote:
Sun Aug 12, 2018 2:57 pm
Rogue1 wrote:
Sun Aug 12, 2018 11:06 am
I would buy those service years if you are sure you want to stay in the county system for employment. If you are, it would be silly not to. I bought back a year under the state pension system and I definitely don't regret it.

-TheDDC

That's the easier call. The harder call is whether I should buy in if I don't know for certain whether I'll be staying, and want to keep options open--that's the one I'm trying to figure out.
[/quote]

A consideration beyond the retirement benefit is the disability benefit. I had a friend who was vested in a state teachers retirement plan. He was in a horrific automobile accident and was permanently disabled. The disability benefit was 75% of his salary until he was eligible for retirement benefits. I don't know if your plan has this type of disability benefit.

DMW
[/quote]

Very good point as well, DMW!

Also, is there a possibility of getting a better deal on health care options at retirement? My states pension system has a Health Options Program for qualified retirees. Not sure if it offers much of a break on premiums but I do know they exist.

-TheDDC

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Re: Buy back service time on pension

Post by #Cruncher » Sun Aug 12, 2018 4:22 pm

Rogue1 wrote:
Sat Aug 11, 2018 1:55 pm
Oh my gosh, if I'm doing this right, based on the cost of comparable annuities, the pension is a no brainer! If I were to retire at age 55 and pay $58k for annuity now, I'd only get $406 monthly with no death benefit (according to this site https://www.immediateannuities.com/info ... tep-1.html).
The pension buyback does look better; but not so much better that I'd call it a "no-brainer". Instead of $406, the buyback would provide $436 which would increase due to an (unspecified) Cost of Living Adjustment (COLA), which the annuity would not.
$436 = 10500 * 1.3% * 3.193

On the other hand, I'd consider the annuity to be more secure. But all this only addresses the question of the buyback versus the annuity. It doesn't address the question of buying an annuity in the first place. Assuming one lived to age 84 [1], the Internal Rate of Return (IRR) on the annuity would only be about 3.37% -- nothing to write home about -- as calculated with the Excel PV function:
$58,000 = -PV(3.37%, 84 - 55, 12 * 406, 0, 0) / 1.0337 ^ (55 - 42)

Although it requires a lot of critical assumptions, I've developed a spreadsheet that will calculate the present value of a buyback (any of the three or all three combined) assuming the original poster lives to various ages. Here is an example, where I set the discount rates to 4.56% which is the IRR of the combined buyback if the pensioner starts the pension at age 55 and lives to age 84.

Code: Select all

  1  Pre retirement discount rate        4.560%
  2  Post retirement discount rate       4.560%
  3  COLA guess                          2.000%
  4  Age now                                 42
  5  Marginal tax rate now              24.000%
  6  Marginal tax rate when retire      24.000%
  7  Final salary                        10,500
  8  Buyback years                        3.193
  9  Buyback cost                        58,643
 10  Years per after tax $1,000         0.07164
 11  Retire age                              52      55      57      60      62      65      67
 12  Percent of salary                     1.0%    1.3%    1.5%    1.8%    2.0%    2.3%    2.5%
 13  After tax 1st year from buyback      68.60   89.19  102.91  123.49  137.21  157.79  171.51

Code: Select all

     Die age                              -------- Present Value per $1,000 of Buyback --------
 15       70                                618     606     567     475     395     258     157
 16       72                                671     671     639     556     482     352     256
 17       74                                721     733     708     634     565     442     350
 18       76                                769     792     773     708     644     527     439
 19       78                                815     848     836     778     719     609     524
 20       80                                859     901     895     845     791     686     605
 21       82                                900     952     951     909     859     760     682
 22       84                                940  [1,000]  1,005     969     924     830     756 [2]
 23       86                                977   1,046   1,056   1,027     985     897     825
 24       88                              1,013   1,090   1,104   1,082   1,044     960     892
 25       90                              1,047   1,132   1,151   1,134   1,100   1,021     955
 26       92                              1,079   1,171   1,194   1,184   1,153   1,078   1,015
 27       94                              1,110   1,209   1,236   1,231   1,203   1,133   1,072
 28       96                              1,139   1,245   1,276   1,276   1,251   1,185   1,127
 29       98                              1,167   1,279   1,314   1,319   1,297   1,235   1,178
 30      100                              1,194   1,312   1,350   1,360   1,340   1,282   1,228
Notes:
  • I use separate discount rate assumptions before and after retirement to allow users to assume different portfolio allocations with consequent different expected returns -- if one invests the money instead of using it for a buyback.
  • The COLA is assumed not to kick in until the pension begins.
  • The tax rates have no effect on the results unless they differ.
  • For a given final salary, it doesn't pay to wait past age 60 to start the pension even if one wants to plan for living to a very old age. This is because proportionally the extra amount from waiting decreases each year. E.g., if one waits from age 52 to 55, one gets 10% more per year. But waiting from age 65 to 67 gets one only 4.35% more per year.
To use the spreadsheet with different assumptions, follow these steps:
  • Select All, Copy, and Paste the following at cell A1 of a blank sheet. [3]

    Code: Select all

    Pre retirement discount rate	0.0456
    Post retirement discount rate	=B1
    COLA guess	0.02
    Age now	42
    Marginal tax rate now	0.24
    Marginal tax rate when retire	0.24
    Final salary	10500		One	Two	Three	Total
    Buyback years	3.193		1.04	1.87	0.283	3.193
    Buyback cost	58643		20248	33016	5379	58643
    Years per after tax $1,000	=B8/((1-B5)*(B9/1000))
    Retire age	52	55	57	60	62	65	67
    Percent of salary	0.01	0.013	0.015	0.018	0.02	0.023	0.025
    After tax 1st year from buyback	=$B7*$B10*B12*(1-$B6)*12
    Die age / present value	
    70	=(B$13/($B$2-$B$3))*(1-((1+$B$3)/(1+$B$2))^($A15-B$11))/(1+$B$1)^(B$11-$B$4)
    72	=(B$13/($B$2-$B$3))*(1-((1+$B$3)/(1+$B$2))^($A16-B$11))/(1+$B$1)^(B$11-$B$4)
    =2*A16-A15	=(B$13/($B$2-$B$3))*(1-((1+$B$3)/(1+$B$2))^($A17-B$11))/(1+$B$1)^(B$11-$B$4)
  • Format as needed for readability.
  • Copy cells B13:B17 right to column H.
  • If desired, change the ages in cells A15 & A16 to something other than 70 & 72. E.g., to 70 & 71 to compute for every year instead of every two years.
  • Copy row 17 down for as many possible "Die Ages" as desired.
  • To see present values for only one of the three possible buybacks instead of all three combined, copy a pair of numbers from cells D8:D9, E8:E9, or F8:F9 to B8:B9.
  1. Life expectancy for a 42 year-old woman is 42.49 years according to the SSA 1980 Cohort Life Table. The original post says that the pension "has decent survivor benefits" -- but doesn't specify what they are. If this were to mean that the pension would pay 100% to the husband should the original poster die first, then it would be better to assume the pension would run for their combined life expectancy. For a man and woman both age 42 this would be 47.84 years or age 90 according to the same life table. (As shown by my longevity estimator.)
  2. Calculation example for $1,000 present value if start at age 55 and live to age 84. (The third line uses the following formula for Present Value of a Growing Annuity.)

    Image

    Code: Select all

       0.07164 = 3.193 / (58.643 * 76%)
      89.19    = 0.07164 * 10500 * 1.3% * 12 * 76%
    1000       = (89.19 / (4.56% - 2%)) * (1 - (1.02 / 1.0456) ^ (84 - 55)) / 1.0456 ^ (55 - 42)
  3. If you have trouble pasting, try "Paste Special" and "Text". If you still have problems, this post by LadyGeek shows another way.

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Re: Buy back service time on pension

Post by Good Listener » Wed Aug 15, 2018 4:27 pm

TheDDC wrote:
Sat Aug 11, 2018 9:12 pm
iceport wrote:
Sat Aug 11, 2018 6:42 pm
Grt2bOutdoors wrote:
Sat Aug 11, 2018 6:36 pm
iceport wrote:
Sat Aug 11, 2018 5:53 pm
Rogue1 wrote:
Sat Aug 11, 2018 5:32 pm
Good Listener: Regarding the possibility of an underfunded pension, I'm not excessively worried about it. Yes, it's a risk, no doubt about it. But while private companies that offer underfunded pensions go bankrupt, disappear, and don't necessarily make good on the pension, I think public employers usually find other ways to cut corners so that they meet their pension obligations--for example, they raise the cost of services, offer the new employees worse benefits, etc. It's not like my public employer is going anywhere; the citizenry is always going to need some level of County services. I just can't imagine the outrage if they tried to default. I know it's a risk, but so is any investment.
Public sector pension cuts have been done. My (early retirement) state pension was cut by ~20% 6 years before I was eligible. COLAs were also slashed. It does happen. Certain accrued benefits are locked in once earned, but not things like early retirement treatments and COLAs.

That being said, a 70% funded ratio is nowhere near the danger zone, in my opinion. (My state pension fund stood at 36% funded last time I checked. :shock: )
The biggest risk to any person expecting a pension; is not how much the pension's currently funded percentage is, rather it's what is the pension's funding rate at the time you have begun taking payments and your age. Pensions where there is drastic underfunding will usually cut benefits to those who are under a certain age (say 70) and where funding is under 50% with no near term turnaround in sight. Look at what is happening with multi-employer pension funds right now, that is what you could reasonably expect to occur if the underfunding gets to that level.

I agree that 70% funded ratio is not the danger zone, there are many private sector workers who's own personal savings are at or below that figure, they are still retiring and many are doing okay.
I don't think it works the same way for public pensions. In general, once a retiree starts receiving public pension benefits, they are far, far better protected legally than before benefits start. Laws vary by state, and all bets are off with municipalities, which have the option of bankruptcy. Can counties go bankrupt?
State pensions are treated as contractual property in courts. Essentially the deferred benefit terms agreed to during state employment are protected as property owned by the employee. I am not sure if these consistent rulings regarding state mentions also translate into county/municipal as well but I would think so. Funding level is generally irrelevant as government finds a way to fund or borrow to pay obligations. In my home state the pension changes that occur were only allowed to be applied to new hires. COLAs for current workers are benefits that were not earned/promised (since they are not retirees yet), so there could be a likely possibility that those could be cut in your state/county in my judgement. My home state has never had a COLA for the pension plans and we are the better for it financially.

I would buy those service years if you are sure you want to stay in the county system for employment. If you are, it would be silly not to. I bought back a year under the state pension system and I definitely don't regret it.

-TheDDC
I agree they are contractual obligations. However imagine a point where pensions took up 100% of the state's budget. Contracts are broken for various reasons and I'm not a lawyer but see that all the time with bankruptcies. Yes I know States can't get bankrupt but in a disaster situation, then things can be changed

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Re: Buy back service time on pension

Post by Dottie57 » Thu Aug 16, 2018 4:24 pm

Good Listener wrote:
Wed Aug 15, 2018 4:27 pm
TheDDC wrote:
Sat Aug 11, 2018 9:12 pm
iceport wrote:
Sat Aug 11, 2018 6:42 pm
Grt2bOutdoors wrote:
Sat Aug 11, 2018 6:36 pm
iceport wrote:
Sat Aug 11, 2018 5:53 pm

Public sector pension cuts have been done. My (early retirement) state pension was cut by ~20% 6 years before I was eligible. COLAs were also slashed. It does happen. Certain accrued benefits are locked in once earned, but not things like early retirement treatments and COLAs.

That being said, a 70% funded ratio is nowhere near the danger zone, in my opinion. (My state pension fund stood at 36% funded last time I checked. :shock: )
The biggest risk to any person expecting a pension; is not how much the pension's currently funded percentage is, rather it's what is the pension's funding rate at the time you have begun taking payments and your age. Pensions where there is drastic underfunding will usually cut benefits to those who are under a certain age (say 70) and where funding is under 50% with no near term turnaround in sight. Look at what is happening with multi-employer pension funds right now, that is what you could reasonably expect to occur if the underfunding gets to that level.

I agree that 70% funded ratio is not the danger zone, there are many private sector workers who's own personal savings are at or below that figure, they are still retiring and many are doing okay.
I don't think it works the same way for public pensions. In general, once a retiree starts receiving public pension benefits, they are far, far better protected legally than before benefits start. Laws vary by state, and all bets are off with municipalities, which have the option of bankruptcy. Can counties go bankrupt?
State pensions are treated as contractual property in courts. Essentially the deferred benefit terms agreed to during state employment are protected as property owned by the employee. I am not sure if these consistent rulings regarding state mentions also translate into county/municipal as well but I would think so. Funding level is generally irrelevant as government finds a way to fund or borrow to pay obligations. In my home state the pension changes that occur were only allowed to be applied to new hires. COLAs for current workers are benefits that were not earned/promised (since they are not retirees yet), so there could be a likely possibility that those could be cut in your state/county in my judgement. My home state has never had a COLA for the pension plans and we are the better for it financially.

I would buy those service years if you are sure you want to stay in the county system for employment. If you are, it would be silly not to. I bought back a year under the state pension system and I definitely don't regret it.

-TheDDC
I agree they are contractual obligations. However imagine a point where pensions took up 100% of the state's budget. Contracts are broken for various reasons and I'm not a lawyer but see that all the time with bankruptcies. Yes I know States can't get bankrupt but in a disaster situation, then things can be changed
A State can’t print money like the Federal govt can. I think they can go broke. We know Cities can go broke.

There is only so much money.... so I suspect pensions can go broke.

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Re: Buy back service time on pension

Post by iceport » Thu Aug 16, 2018 4:52 pm

Dottie57 wrote:
Thu Aug 16, 2018 4:24 pm
A State can’t print money like the Federal govt can. I think they can go broke.
Hi Dottie57,

I don't think that's correct. I'm no lawyer, but I've looked into it a little. My understanding is that there is no legal mechanism for states to declare bankruptcy. Municipalities, yes. Counties, apparently. US Territories, yes. But not states. Some people want that to change. I sure hope it doesn't.

They can't print money but they can collect taxes sufficient to meet their financial obligations. And when they knowingly underfund their pensions for decades and push the day of reckoning further and further into the future, eventually they might need to raise taxes. It's certainly no fault of pension beneficiaries — or state bond holders, for that matter — that some states have not met their financial obligations responsibly.

Larry Swedroe has sounded the alarm that some states will *definitely* default on their bonds in the future, but he acknowledges that the last extremely rare case was in the Great Depression. The odds seem a lot slimmer to me.
"Discipline matters more than allocation.” ─William Bernstein

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Re: Buy back service time on pension

Post by Dottie57 » Thu Aug 16, 2018 5:23 pm

iceport wrote:
Thu Aug 16, 2018 4:52 pm
Dottie57 wrote:
Thu Aug 16, 2018 4:24 pm
A State can’t print money like the Federal govt can. I think they can go broke.
Hi Dottie57,

I don't think that's correct. I'm no lawyer, but I've looked into it a little. My understanding is that there is no legal mechanism for states to declare bankruptcy. Municipalities, yes. Counties, apparently. US Territories, yes. But not states. Some people want that to change. I sure hope it doesn't.

They can't print money but they can collect taxes sufficient to meet their financial obligations. And when they knowingly underfund their pensions for decades and push the day of reckoning further and further into the future, eventually they might need to raise taxes. It's certainly no fault of pension beneficiaries — or state bond holders, for that matter — that some states have not met their financial obligations responsibly.


Larry Swedroe has sounded the alarm that some states will *definitely* default on their bonds in the future, but he acknowledges that the last extremely rare case was in the Great Depression. The odds seem a lot slimmer to me.
Cities can go bankrupt. Counties can go bankrupt. I assume that states can do so. All of them can potentially tax citizens.

State pensions in my state seems to promise what they can’t provide. State workers and state government both contribute a percent of employee wages to the pension. Yet pension fund is considered Underfunded. Seems like benefits were over-Promsed.

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iceport
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Re: Buy back service time on pension

Post by iceport » Thu Aug 16, 2018 5:52 pm

Dottie57 wrote:
Thu Aug 16, 2018 5:23 pm
Cities can go bankrupt. Counties can go bankrupt. I assume that states can do so.
Not without new laws and new court decisions. A concise summary: 3 Questions on State Bankruptcy
"Discipline matters more than allocation.” ─William Bernstein

Dottie57
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Re: Buy back service time on pension

Post by Dottie57 » Thu Aug 16, 2018 6:11 pm

iceport wrote:
Thu Aug 16, 2018 5:52 pm
Dottie57 wrote:
Thu Aug 16, 2018 5:23 pm
Cities can go bankrupt. Counties can go bankrupt. I assume that states can do so.
Not without new laws and new court decisions. A concise summary: 3 Questions on State Bankruptcy
Thanks - will investigate.

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Posts: 169
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Re: Buy back service time on pension

Post by TheDDC » Thu Aug 16, 2018 10:56 pm

Good Listener wrote:
Wed Aug 15, 2018 4:27 pm
TheDDC wrote:
Sat Aug 11, 2018 9:12 pm
iceport wrote:
Sat Aug 11, 2018 6:42 pm
Grt2bOutdoors wrote:
Sat Aug 11, 2018 6:36 pm
iceport wrote:
Sat Aug 11, 2018 5:53 pm

Public sector pension cuts have been done. My (early retirement) state pension was cut by ~20% 6 years before I was eligible. COLAs were also slashed. It does happen. Certain accrued benefits are locked in once earned, but not things like early retirement treatments and COLAs.

That being said, a 70% funded ratio is nowhere near the danger zone, in my opinion. (My state pension fund stood at 36% funded last time I checked. :shock: )
The biggest risk to any person expecting a pension; is not how much the pension's currently funded percentage is, rather it's what is the pension's funding rate at the time you have begun taking payments and your age. Pensions where there is drastic underfunding will usually cut benefits to those who are under a certain age (say 70) and where funding is under 50% with no near term turnaround in sight. Look at what is happening with multi-employer pension funds right now, that is what you could reasonably expect to occur if the underfunding gets to that level.

I agree that 70% funded ratio is not the danger zone, there are many private sector workers who's own personal savings are at or below that figure, they are still retiring and many are doing okay.
I don't think it works the same way for public pensions. In general, once a retiree starts receiving public pension benefits, they are far, far better protected legally than before benefits start. Laws vary by state, and all bets are off with municipalities, which have the option of bankruptcy. Can counties go bankrupt?
State pensions are treated as contractual property in courts. Essentially the deferred benefit terms agreed to during state employment are protected as property owned by the employee. I am not sure if these consistent rulings regarding state mentions also translate into county/municipal as well but I would think so. Funding level is generally irrelevant as government finds a way to fund or borrow to pay obligations. In my home state the pension changes that occur were only allowed to be applied to new hires. COLAs for current workers are benefits that were not earned/promised (since they are not retirees yet), so there could be a likely possibility that those could be cut in your state/county in my judgement. My home state has never had a COLA for the pension plans and we are the better for it financially.

I would buy those service years if you are sure you want to stay in the county system for employment. If you are, it would be silly not to. I bought back a year under the state pension system and I definitely don't regret it.

-TheDDC
I agree they are contractual obligations. However imagine a point where pensions took up 100% of the state's budget. Contracts are broken for various reasons and I'm not a lawyer but see that all the time with bankruptcies. Yes I know States can't get bankrupt but in a disaster situation, then things can be changed
Again, as you may not understand this if you are not in a pension system like those of us who are and know about it. The state would need to meet obligations by taking more in the form of taxes and fees. As the link referred to in this thread shows, pensions are treated as contractual property. I know some may fantasize about breaking pension promises because of some sort of mislead beliefs. The only legal changes that have and are able to be made are for future employees who are not in the system.

-TheDDC

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Posts: 169
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Re: Buy back service time on pension

Post by TheDDC » Thu Aug 16, 2018 11:00 pm

Dottie57 wrote:
Thu Aug 16, 2018 4:24 pm
Good Listener wrote:
Wed Aug 15, 2018 4:27 pm
TheDDC wrote:
Sat Aug 11, 2018 9:12 pm
iceport wrote:
Sat Aug 11, 2018 6:42 pm
Grt2bOutdoors wrote:
Sat Aug 11, 2018 6:36 pm


The biggest risk to any person expecting a pension; is not how much the pension's currently funded percentage is, rather it's what is the pension's funding rate at the time you have begun taking payments and your age. Pensions where there is drastic underfunding will usually cut benefits to those who are under a certain age (say 70) and where funding is under 50% with no near term turnaround in sight. Look at what is happening with multi-employer pension funds right now, that is what you could reasonably expect to occur if the underfunding gets to that level.

I agree that 70% funded ratio is not the danger zone, there are many private sector workers who's own personal savings are at or below that figure, they are still retiring and many are doing okay.
I don't think it works the same way for public pensions. In general, once a retiree starts receiving public pension benefits, they are far, far better protected legally than before benefits start. Laws vary by state, and all bets are off with municipalities, which have the option of bankruptcy. Can counties go bankrupt?
State pensions are treated as contractual property in courts. Essentially the deferred benefit terms agreed to during state employment are protected as property owned by the employee. I am not sure if these consistent rulings regarding state mentions also translate into county/municipal as well but I would think so. Funding level is generally irrelevant as government finds a way to fund or borrow to pay obligations. In my home state the pension changes that occur were only allowed to be applied to new hires. COLAs for current workers are benefits that were not earned/promised (since they are not retirees yet), so there could be a likely possibility that those could be cut in your state/county in my judgement. My home state has never had a COLA for the pension plans and we are the better for it financially.

I would buy those service years if you are sure you want to stay in the county system for employment. If you are, it would be silly not to. I bought back a year under the state pension system and I definitely don't regret it.

-TheDDC
I agree they are contractual obligations. However imagine a point where pensions took up 100% of the state's budget. Contracts are broken for various reasons and I'm not a lawyer but see that all the time with bankruptcies. Yes I know States can't get bankrupt but in a disaster situation, then things can be changed
A State can’t print money like the Federal govt can. I think they can go broke. We know Cities can go broke.

There is only so much money.... so I suspect pensions can go broke.
Trust me, you wouldn't want to live in a bankrupt state and it's not going that way. They would "go after yours first." Theres no "going broke" when it comes to owned benefits. If that were the case then no one's retirement would legally be safe at all.

And the state would still need to fulfill legal obligations.

-TheDDC

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iceport
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Re: Buy back service time on pension

Post by iceport » Fri Aug 17, 2018 8:45 am

TheDDC wrote:
Thu Aug 16, 2018 10:56 pm
I know some may fantasize about breaking pension promises because of some sort of mislead beliefs. The only legal changes that have and are able to be made are for future employees who are not in the system.
-TheDDC
That statement seems a bit too broad. Here is a quick list of some of the promises broken in my state for employees already in the system (not necessarily complete):

— normal retirement age increased by 3 years (supposedly this only affects benefit accrual going forward, that in certain cases employees could have different normal retirement ages for the years worked before and after the change took effect); employees could opt to pay (contribute more) to retain the original age
— the penalty doubled for early retirement
— COLAs slashed repeatedly
— employee contribution rates increased

Some of the provisions have been so confusing that after 7 years there is still not enough agreement to allow the finalization of a revised summary plan description. The ones that applied to me resulted in an early retirement benefit roughly 20% lower than had been promised for the first 25 years of my employment. :annoyed I call that a broken promise...

Also, my understanding is that legal protections vary by state. See: Legal Constraints on Changes in State and Local Pensions
"Discipline matters more than allocation.” ─William Bernstein

TheDDC
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Joined: Mon Jan 08, 2018 11:11 am

Re: Buy back service time on pension

Post by TheDDC » Sun Aug 19, 2018 2:43 pm

iceport wrote:
Fri Aug 17, 2018 8:45 am
TheDDC wrote:
Thu Aug 16, 2018 10:56 pm
I know some may fantasize about breaking pension promises because of some sort of mislead beliefs. The only legal changes that have and are able to be made are for future employees who are not in the system.
-TheDDC
That statement seems a bit too broad. Here is a quick list of some of the promises broken in my state for employees already in the system (not necessarily complete):

— normal retirement age increased by 3 years (supposedly this only affects benefit accrual going forward, that in certain cases employees could have different normal retirement ages for the years worked before and after the change took effect); employees could opt to pay (contribute more) to retain the original age
— the penalty doubled for early retirement
— COLAs slashed repeatedly
— employee contribution rates increased

Some of the provisions have been so confusing that after 7 years there is still not enough agreement to allow the finalization of a revised summary plan description. The ones that applied to me resulted in an early retirement benefit roughly 20% lower than had been promised for the first 25 years of my employment. :annoyed I call that a broken promise...

Also, my understanding is that legal protections vary by state. See: Legal Constraints on Changes in State and Local Pensions
I'm not sure if these have been challenged legally in your state as of yet. The COLA changes you speak of specifically if challenged in court would most likely hold up for those not already retired since those are not earned yet and do not apply to the current status of the employee. COLAs are a tough one to guarantee for those who have not declared retirement yet. Retirement systems and legislation impacting these systems are very specific about status (retired, active members, inactive members, level of membership, vested, etc.)

The retirement age, again, only pertains to those of a retired status, not for those yet to be retired. Contribution rates could be a sticking point in court considering the membership did not vote on the change.

Among items not on your list that would not hold up in court if challenged would be benefit deductions based on the current formula (years x salary x multiplier) which is the most important aspect to those expecting the terms of the contract to be fulfilled. Those are the benefits that must be funded and paid.

You are right in the protections varying by state. My state has very strong court-tested protections for pension guarantees and no serious politician (in a supermajority Republican legislature) has pushed strongly for anything that would change benefits for current members or retirees. We do not, and have never had, COLAs, which I suspect also positively impacts the issue. The two substantial changes in the last 8 years have only affected future members. The pension "crisis" only came two light after most of the public discovered school districts and the legislature where shirking their responsibility to adequately fund the system in my state. The employees paying into the system had to, by law.

-TheDDC

Madbull
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Re: Buy back service time on pension

Post by Madbull » Sun Aug 19, 2018 3:27 pm

Just to piggyback off the above.....the only change our pension system has undergone recently to my knowledge was updating our estimated life expectancy figures to be more accurate, (since they hadn’t been adjusted since creation of the plan in ‘68). While that did result in a smaller estimated benefit upon retirement, it was VERY slight to those already vested, and obviously didn’t affect current retirees.

It’s also good planning to ensure financial obligations are met, so I had no qualms with it.

Reference politicians going after public pensions, insert Ted Cruz in Texas a few years ago. Thank heaven he dropped the ridiculous notion and withdrew the proposed bill.

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iceport
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Re: Buy back service time on pension

Post by iceport » Sun Aug 19, 2018 3:35 pm

TheDDC,

I think we're largely in agreement. The only point I might quibble about is this one:
TheDDC wrote:
Sun Aug 19, 2018 2:43 pm
The retirement age, again, only pertains to those of a retired status, not for those yet to be retired.
That's not consistent with my understanding that normal retirement age is part of the core protected pension benefits. Unless the plan participants are granted 3 more years of life, their benefits are cut by at least the last three years of benefits they would have otherwise received. This is why the age change could not be applied retroactively, but only for future years of employment/benefit accrual. (In fact, I believe the complication this presents is one of the reasons why agreement on a revised summary plan description has been elusive.)

A retirement actuary forum member described to me that normal-age retirement benefits — including the benefit formula, normal retirement age, etc. — are typically considered the core protected benefits. Things like COLAs and early retirement provisions are not. But changing them after 25 years of employment still feels like a broken promise to me.
"Discipline matters more than allocation.” ─William Bernstein

Mickey7
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Re: Buy back service time on pension

Post by Mickey7 » Sun Aug 19, 2018 9:03 pm

Rogue1

Another consideration for you to keep in mind is the possibility that the buy back rules might change. About a decade ago the rule for buy backs for service time were radically altered. I was able to sneak in and got my year for under $500, a no brainer. Now on the eve of retirement I looked into buying my year of unused sick year and the break even mark has moved to over 18 years!

Good luck on whatever your choice will be.

TheDDC
Posts: 169
Joined: Mon Jan 08, 2018 11:11 am

Re: Buy back service time on pension

Post by TheDDC » Sun Aug 19, 2018 9:51 pm

iceport wrote:
Sun Aug 19, 2018 3:35 pm
TheDDC,

I think we're largely in agreement. The only point I might quibble about is this one:
TheDDC wrote:
Sun Aug 19, 2018 2:43 pm
The retirement age, again, only pertains to those of a retired status, not for those yet to be retired.
That's not consistent with my understanding that normal retirement age is part of the core protected pension benefits. Unless the plan participants are granted 3 more years of life, their benefits are cut by at least the last three years of benefits they would have otherwise received. This is why the age change could not be applied retroactively, but only for future years of employment/benefit accrual. (In fact, I believe the complication this presents is one of the reasons why agreement on a revised summary plan description has been elusive.)

A retirement actuary forum member described to me that normal-age retirement benefits — including the benefit formula, normal retirement age, etc. — are typically considered the core protected benefits. Things like COLAs and early retirement provisions are not. But changing them after 25 years of employment still feels like a broken promise to me.
Interesting. This sounds like a new one and a creative one designed to throw something less egregious into the mix and let the courts digest. Has anyone filed suit over that provision? The most I think they tried (and were close to here) was applying the "best five years" (currently best three) salary rule retroactively, but even that measure failed.

In light of this, however, it seems as though buying years of service would make even more sense for the OP...

-TheDDC

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iceport
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Re: Buy back service time on pension

Post by iceport » Sun Aug 19, 2018 10:04 pm

TheDDC wrote:
Sun Aug 19, 2018 9:51 pm
Has anyone filed suit over that provision?
No lawsuits in my state! The staff of the various unions were all in favor of giving up pension benefits. (There was a larger political objective for them, and offering up cuts to the benefits of those they represented was seen as necessary to achieve that objective. :annoyed ) So essential support for any legal challenge was missing.

I think the state would have prevailed anyway. The cuts weren't technically retroactive. And even if they were, in my estimation the offer to buying back the original age could have been seen as a reasonable remedy.
"Discipline matters more than allocation.” ─William Bernstein

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