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February 2021 - Understanding PSERS Retirement Pension Options Thumbnail

February 2021 - Understanding PSERS Retirement Pension Options

TRICKS OF THE TRADE

Understanding PSERS Retirement Pension Options

Prepared by Michael Menninger, CFP®
February 2021


Do you want to learn about PSERS Retirement and Options? Read about The Public School Employees’ Retirement System (PSERS), an agency of the Commonwealth of Pennsylvania that administers the pension plan for Pennsylvania’s public school employees.           

Understanding PSERS Retirement Pension Options

            The Public School Employees’ Retirement System (PSERS) is an agency of the Commonwealth of Pennsylvania that administers the retirement pension plan for Pennsylvania’s public school employees. The cost of this plan is shared with the plan members as well as with multiple employers throughout the Commonwealth of Pennsylvania.  These employers are: all Pennsylvania public school districts, intermediate units, vocational‐technical or career technology schools, participating charter schools, community colleges, the state‐owned universities, and any other employer who offers PSERS as a retirement plan option.

            In my 20+ years serving as a financial planner, I have not encountered a more lucrative pension than PSERS, and I have seen many pensions from Fortune 100 companies and other governmental organizations. Further, in my experience as a financial planner, I have found that many participants in the PSERS pension system don’t really understand it.  

How does PSERS retirement pensions work? 

While there are numerous nuances (such as buying out-of-state credits, high salary employees who have slightly different rules, etc.), the fundamentals of the pension are rather simple.  Thus, the purpose of this document is to provide a general understanding of how the pension works, and how it applies to the mainstream of employees.

PSERS retirement: Old vs. New Pension Plan

The “old” pension plan is for participants who were employed prior to July 1, 2011, and the “new” pension plan applies to those who became employed after that date.  The new pension plan was created because of how lucrative the old plan was, and the new plan needed to either reduce the benefit or increase the funding to afford the cost of the benefit.

            Old – Under a code referred to as T-D (and T-C in a few other cases):

  • The employee contributes 7.5% of their gross income toward the pension plan
  • The recipient receives a pension multiplier of 2.5%, as described later. 

            New – There are two programs referred to as T-E and T-F, and they essentially enable the participant to either reduce their benefit, or pay more to receive the higher benefit.  Plus, the member is placed in a “shared risk” with the employer, which means their contributions amounts will vary based on how well the pension fund’s investments perform.  All new members are automatically placed in the T-E program, and have a one-time ability to elect T-F within 45 days of receiving written notification from PSERS.


T-E

  • The employee contributes 7.5% (or up to 2% more because of shared risk) of their gross income
  • The pension multiplier is 2%.

T-F

  • The employee contributes 10.3% (or up to 2% more because of shared risk) of their gross income
  • The pension multiplier is 2.5%.

 

When can you collect a full retirement pension from PSERS? 

Many people want to know when they can collect a full retirement pension from PSERS.  They also have questions like whether they can work part time after retiring from PSERS.  We explore these questions in this section. 


Retirement Eligibility and Formula

NORMAL RETIREMENT

Class T-C and T-D

  • Age 62 with at least 1 year of service
  • Age 60 with 30 or more years of service
  • 35 years of service, regardless of age

Class T-E and T-F

  • Age 65 with at least 3 years of service
  • 35 years of service and an age in combination with service adds up to at least 92 (for example, 36 years of service plus age 56 equals 92)

EARLY RETIREMENT

The pension is reduced by approximately 4% to 7% for each year the participant begins their pension before normal retirement age (noted above).  However, there is a special provision for workers that were employed for at least 25 years and have attained age 55.  For workers who meet this eligibility, they can collect their pension only with a 3% reduction for each year taken prior to their normal retirement age.  

BASIC RETIREMENT FORMULA and PSERS RETIREMENT CALCULATOR

Final Average Salary (FAS)    x    Years of Service    x    Multiplier (%)

Notes:

FAS – The average of a member’s highest compensation received during any 3 school years.

For example, if a member retired after 20 years of services, their FAS was $60,000 and their multiplier is 2.5%, then their pension would equal:

              (20) x ($60,000) x (2.5%) = $30,000 per year, or $2,500 per month.

Note that the $2,500 per month pension is based on “single life”, which means that the pension will be paid monthly until the member dies, and nothing will go to any beneficiary.

Adjustments to PSERS Retirement Pension:

               It can be easy to imagine the “risk” associated with collecting a pension that disappears if the member were to die.  Thus, PSERS (as well as nearly all pension administrators) provides several additional options that reduce the pension amount, but offer alternatives that would provide a benefit to the member’s beneficiaries.

Withdraw Contributions and Interest – At the time of retirement, the worker may withdraw their contributions and interest earned.  In doing so, it may reduce their benefit by around one-third, but it gives them a lump sum of money that can be rolled over into an IRA.   This allows the member additional flexibility for withdrawing assets and provides assets that can be passed on to a beneficiary. 

Option 1 – By taking a reduced monthly pension amount, it will create a declining balance death benefit that typically lasts around 17 years.  For example, if a member was receiving a pension of $2,500 per month there exists a death benefit (approximately $500,000) that is reduced by $2,500 per month as the pension is paid to the member.  Therefore, if the member dies after collecting their pension for 10 months, their beneficiary will receive $475,000 ($500,00 minus 10 x $2,500). 

Survivorship Options – The pension benefit is reduced, but also provides a percentage of the benefit to the named beneficiary.  The survivor percentages are 100% (Option 2) or 50% (Option 3).  As can be expected, the largest reduction in the monthly pension benefit would be if the survivor receives 100% of the benefit if the member passes away.

Selecting an Option in your PSERS retirement pension:

            We strongly encourage anyone who intends to retire with their PSERS pension to seek the advice from a skilled financial advisor.   There are many factors that will affect your decision, such as other assets you may own, health and life expectancy of you and your beneficiary, income you may have during retirement, your income needs, and a variety of other factors.  That said, it is very rare that we would recommend the single life annuity, as it provides the least amount of flexibility to the member and no beneficiary payout whatsoever.  We have seen others recommend a “pension maximization” strategy, which essentially has the member collect the full benefit (compared to the 100% survivor benefit) and take the difference to buy life insurance.  In our professional opinion, we have found that this difference rarely can buy enough life insurance to replace the survivor’s benefit, so this strategy should be reviewed very carefully prior to implementation.    

            If you, or anyone you know is considering retirement and collecting their pension from PSERS or any other entity, please feel free to contact us, as we will take the time to teach you how PSERS retirement pension works, and work with you to assess the most effective payout method.   



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