A look at pensions, taxes and re-employment
Get the facts about retirement benefits, taxation of benefits and other issues concerning the state(s) where you were employed, the state where you presently reside and any stat to which you might relocate.
Section A: TEACHERS' PENSION SYSTEM
Full and partial funding and year fully funded
Ratio of active to retired teachers
Percentage paid by employer and employee
Revenues of state and local government employment-retirement systems
Summary
Vesting
Final Average Salary (FAS) Formula
Percentage limits of FAS
Active and Retired Teachers' Legislation
Number of state and local government employee retirement systems
Summary
State Income Tax
Sales tax and food and prescription drug exemptions
Taxes on social security, state pensions, out-of-state pensions
Summary
Category One
States that do not permit retirees to return to work in the public sector
Category Two
States that permit retirees to return to work with stipulations
Category Three
States that have different approaches to public sector re-employment
| Table 1 - Table on full and partial funding;the date of full funding anticipated |
| Table 2 - Table on number contributing, number collecting from the teachers' retirement system and ratio between them |
| Table 3 - Table on percent contributed by employee; employer; total contribution |
| Table 4 - Vesting, Years used for Final Average Salary; highest percentage received of Final Average Salary |
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Table 5 - Average Asset Gain received by pension over ten year period; average interest received by teachers' fund in same period; do retired teachers receive benefits that legislature enacts for active teachers
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| Table 6 - Number of state and local government employee retirement systems over a four year period in each state |
| Table 7 - State Income Tax by state; tax rate if based on income amount; personal exemptions allowed - NOTES |
| Table 8 - State sales tax; exemptions allowed on food, prescription and non-prescription drugs |
| Table 9 - Each state's traetment of taxation of Social Security; state pensions; out of state public pensions - NOTES |
INTRODUCTION
Retirement brings major life changes in terms of finances, intellectual pursuits and employment opportunities. This book has been researched and compiled to provide current information regarding teacher retirement issues. It is the result of a joint effort of the National Retired Teachers' Association (NRTA) and the Retired Educators Association of Massachusetts (REAM.). The following members did the research and compiled it in the format presented: Marie Ardito, Harolyn Bresniick, Patricia Delaney, Ann Donovan, Marilyn O'Neill, Lorraine Stordy and Mary Walsh. A research grant was awarded to REAM by the NRTA in order to fund this project.
In order to conduct this project a many faceted questionnaire was submitted to the retirement boards of the fifty states. At this time we wish to thank the responders for their prompt replies, which provided the study with indispensable data. The information collected will enable teachers and retirement boards to compare pension and tax ramifications in the fifty states.
Most states have a separate department responsible for collecting, managing and distributing funds for teachers' pensions. Others manage all the public pension funds for their state workers' pensions. This study does not differentiate between the two.
This section provides information on the pension funds primarily including the sources of revenue and the stability of the funds.
Table 1 shows which states are fully funded, the percentage funded, and where applicable, the year in which full funding is anticipated. The term "unfunded liability" is one used frequently in speaking about pensions that are not fully funded. The term is seldom defined. In layman's terms "unfunded liability" can be defined as follows:
Unfunded Liability equals Actuarial Liability minus Assets
Actuarial Liability is the amount owed to all active and retired employees entitled to a benefit.
Assets are the monies and properties accumulated in the retirement fund.
Unfunded Liability is the amount by which the state's obligation exceeds its assets.
There are states that were once fully funded, but the employer, the state, did not continue paying its share and a new unfunded liability occurred.
One factor to consider in the funding of the pension system is the ratio of those paying into the system to those receiving a benefit and thus drawing from the system. The Table 2 shows the number of active and retired employees and the ratio between the two.
The percentage paid by the employee and the employer is the main source of revenue of the fund. Table 3 shows these percentages. The percentage rate of the employee is often changed. This table also reflects when a change in the percentage occurs, and how it affects those already paying into the fund or new hires. There are times when the employer does not meet its obligation to fund fully its portion of the contribution. Thus the unfunded liability is increased.
A final area that affects the fund is whether a state allows retired teachers to return to work after they retire while not requiring them to pay into the system. This topic is treated in Section D of this document.
SUMMARY OF TEACHERS' PENSION SYSTEM
This section considers three (3) main sources of revenue that comprise teachers' pension funds. They include contribution made by the employer and the employee and the amount of return accrued on these investments.
Data was obtained mainly from replies to a questionnaire to Teachers' Retirement systems in each state. The information provided regarding the amount of return from investments in the pension funds for each state was obtained from the United States Census Bureau in Washington, D.C.
This section concentrates on areas that affect teachers' pensions. They include vesting, calculation of the Final Average Salary (FAS), and percentage received.
Another aspect focuses on state laws and examines whether the laws enacted for active teachers retrospectively apply to retired teachers.
VESTING
Vesting is a guideline stipulating the number of years one must work for a system in order to be eligible to receive any pension from that system. Significant changes have occurred in vesting over the past fifteen (15) years.
Prior to 1974 vesting was granted at twenty-five (25) years of service in the private sector. In 1974 the Employee Retirement Income Security Act required vesting after ten (10) years of employment. In 1986 the period was further lowered to a maximum of five (5) years.
The public sector pension plans have examined the changes made by the private sector and have followed their example. In the early 1900's state requirements ranged from three (3) to twenty (20) years for vesting. This study shows that over twenty percent (20%) of the states have made changes in their vesting laws. Most states have followed the private sector and require five (5) or fewer years for vesting.
If one leaves service prior to vesting, that employee loses any rights to the pension plan. Contributions one has made are returned only at the request of the individual. States determine the amount of interest added to the contribution. In some instances the employer also contributes to the pension so the amount collected at severance would be from the employee/employer contributions plus the interest on both. In contrast, in those states, in which only the employee contributes to the fund, the employee leaving prior to vesting receives his/her own contribution plus interest.
The number of years used to calculate the FAS greatly influences the pension a teacher will receive. The majority of states calculate the average on a three (3) year basis. States using more than three (3) years to determine the FAS put prospective retirees at a financial disadvantage. More than ten percent (10%) of the states over the last fifteen (15) years have lowered the number of years required.
This study does not consider elements that constitute one's salary. In some states salary is the contractual amount a person is paid. Other states may include in salary longevity, sick leave buy-back, buy-outs and stipends. The more elements added to the definition of salary, the higher the FAS.
Although the majority of states do not set a limit, there is a de-facto limit set by the formula used to calculate the pension. According to the formula of some states, one would literally have to teach until one hundred (100) years of age to receive one hundred percent (100%). The FAS "no limit" status is misleading because very few states have a formula that would enable teachers to reach the one hundred percent (100%) status within a reasonable span of years. See Table 4.
States should consider extending legislation passed to improve benefits for active teachers to retired teachers. Benefits obtained through union negotiations, whether for salaries or working conditions were non-existent during the careers of most retirees. Many benefits were offered after a high percentage of those retired were no longer in the work force. Some states have allowed benefits to be extended to retirees through legislation. See Table 5. Other states, although not giving the same benefit, give a corresponding benefit to retirees.
As membership in Retired Teachers' Associations increases and members become more vocal, changes are anticipated. Please note: A number of states did not answer this question so the report in this area is incomplete.
This study researched the percentage of gain that was achieved from the funds over the past ten (10) years and the amount of interest attached to each teacher's fund during the same period. One of the main expenditures other than payment of the pension is the cost of administering the funds. Data is provided on the number of employee retirement systems in each state. A four-year study shows movement within the states to increase or decrease the number of systems.
COLAs were not discussed because the National Retired Teachers' Association (NRTA) has a committee that thoroughly researches this topic. The NRTA publishes up-dated information on this topic on a regular basis.
NUMBER OF STATE AND LOCAL GOVERNMENT
EMPLOYEE RETIREMENT SYSTEMS
Table 6 is provided for informational purposes only to illustrate the great discrepancy in the number of systems from state to state. A four (4) year period was examined to show that these numbers are not static.
SUMMARY OF TEACHERS' PENSIONS
This section concentrates on specific areas that directly affect the amount of pension one would receive. The topic of vesting determines the number of years before one is eligible for a pension. The number of years used to calculate a teacher's Final Average Salary is directly related to the pension amount received.
The average percent of asset gain over a ten (10) year period could more appropriately have been reported in the previous section of this study. This study, however, wanted to compare the amount funds made to the amount of average interest attached to the teacher's personal funds in the same ten (10) year period.
The states reporting vary in the amount of interest returns applied to an individual teacher's account. Wisconsin was the only state to return one hundred percent (100%) of the earnings to the teacher. Connecticut returns ninety-nine and one half percent (99.5%); some states return eighty percent (80%); and approximately fifteen percent (15%) of the states return zero percent (0%) of the earned interest to a teacher's account.
It is evident that the earned interest from the pension fund is used differently by the states. Some states use the interest to pay for the administrative costs of the fund. Others use it to pay for some benefits given to retirees.
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Since some states have more than one retirement system, the findings of this study are being disseminated for informational purposes only.
The material from Table 4 and Table 5 were obtained from Teachers' Retirement Systems within each state. The material on Table 6 was obtained from the United States Census Bureau in Washington, D. C.
SECTION C
TAX STRUCTURE OF STATES
Many retirees relocate to other states. They should be informed about the tax advantages and disadvantages of such a move, as they will be living on a fixed income. This section is informational. Knowledge of a state's tax structure and the
effects of such a structure on retirees' income will facilitate informed decision-making. The data provided was in effect at the time of the research. Taxes change yearly. It is important that any Retired Teachers' Association (RTA) using this information note that these tax rates were in effect in 2002. Tax information should be validated and verified by accessing state web sites found elsewhere in this section. The goal of this study is twofold: to provide data enabling educators to make informed decisions and to assist RTA's in their efforts to improve benefits for members.
All states need a source of income. For forty-one (41) states the main revenue base is an income tax. New Hampshire and Tennessee are two (2) of the nine (9) that do not have an income tax. They tax income from interest and dividends. Seven (7) states: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not tax personal income. Of the forty-one (41) states that have an income tax, only five (5) have a flat rate: Colorado, Illinois, Indiana, Massachusetts, and Michigan. The other thirty-five (35) states have a graduated income tax that use from two (2) to ten (10) different brackets of income in considering the taxes they impose. Many of these thirty-five (35) states base the tax on federal returns; typically taking a portion of what one pays the IRS or using federal adjusted gross income or taxable income as a starting point.
Table 7 shows each state's rate of taxation on personal income, the number of different income brackets considered, and the amount of income that is exempt. Another form of revenue is the sales tax. All states except Alaska, Delaware, Montana, New Hampshire, and Oregon collect sales taxes. Some states have a single rate, while others have a varied rate throughout the state or a different rate on certain products. Most states exempt prescription drugs from sales tax. Some also exempt non-restaurant food purchases and a few exempt non-prescription drugs.
Table 8 provides information on each state's sales tax and exemptions as they relate to drugs and food.
For the purpose of this study sales tax exemptions have been limited to these three categories.
Table 9 shows each states treatment of taxation of Social Security; state pensions;and out of state public pensions.
SUMMARY OF SECTION C
Section C addressed the main sources of taxation. Interested parties can find information about property taxes and exemptions for senior citizens by consulting the following web site:
http://www.retirementliving.com/RLtaxes.html
This study did not consider the issue of volunteerism in public service to obtain property tax relief. This contingency is handled at the local level through the administrative agency of the city/town at the request of the Council on Aging of each community when a senior petitions for it.
The information provided in this section was obtained from different sources. Much of the data was received from representatives of the retirement board of the relevant state.
The information on the state income tax structure was made available through the Federation of Tax Administrators at the following web site:
http://taxadmin.org/fta/rate/ind_inc.html
Sales tax, Social Security, and state pension literature was obtained via "The Retirement Living Information Center, Inc." of Redding, CT through their web site.
http://www.retirementliving.com/Rltaxes.html
RETIREES RETURNING TO PUBLIC SECTOR WORK
Many states are beginning to explore the area of retirees returning to public sector work. Although states have a rule in place at present, they are re-examining it because of the teacher shortage throughout the country.
This section applies only to retirees returning to work in the same state in which they receive a state pension. It is also limited to retirees returning to work in public sector employment. The stipulations with regard to salary are state imposed and do not reflect any limitations on earnings by Social Security.
The data compiled in this section will be reported differently from that of other sections. This section applies only to retirees who wish to return to teaching in the same state where they collect their pension. For the purpose of this study exploration included the following questions:
Because of the nature of the responses this section is in narrative form. The findings are divided into three categories.
TO RETURN TO WORK IN THE PUBLIC SECTOR
In Delaware, New Hampshire, New Jersey and Pennsylvania if teachers collecting a state pension return to public sector employment, their pension checks will cease. In all instances the pensions will resume when they re-retire. They will receive, in most instances, an additional benefit because they will have been required to contribute to the pension system.
Delaware requires retired teachers who return to employment to stop receiving pension benefits.
New Hampshire does not allow retirees to return full-time in a position covered by the New Hampshire Retirement System (NHRS). Retirees can substitute or work part-time for a covered employer. If they return to an NHRS covered position, their pension stops until they retire again. Additional salary/service credit will put the retirees on a higher pension. Members who are restored to service pay the same five percent (5%) that active members pay into the NHRS.
New Jersey does not allow retirees to return to public employment without an effect on their benefits. If they accept full-time or part-time employment in a position covered by the Teachers' Pension Annuity Fund (TPAF), they must re-enroll in the pension fund. Retirement allowances will be suspended for the duration of employment.
Pennsylvania retirees may only return to work under emergency conditions in a public school without stoppage of their pension payment. Members may work no longer than ninety-five (95) days. If members return for any amount of time under non-emergency conditions, their pension payment stops. To resume the retirement benefit, members must terminate employment and re-apply.
If retirees return to employment on a non-emergency basis, the employer must withhold contributions immediately, provided the members are hired on a full-time basis. If members are hired on a part-time basis, they are expected to qualify for Pennsylvania State Employee Retirement System membership by working eighty (80) days or 500 hours in the school year. Retirees who have returned to qualifying school employment pay the same contribution rate of seven one-half percent (7.5%) as new employees. Returning to employment would most likely increase a pension.
CATEGORY TWO
STATES THAT PERMIT RETIREES TO
RETURN TO WORK WITH STIPULATIONS
The majority of the states are in this category. The stipulations differ widely in a number of areas. One is the length of time retirees must be terminated before resuming employment. Some states allow immediate rehiring; some specify up to two (2) years before a rehire; others allow rehiring, but not by the same employer.
Another stipulation deals with the amount of salary retirees may earn in public sector jobs. If retirees exceed this stipulation, a penalty is incurred in most states. A common penalty is that the pension ceases and is resumed when one retires again. In other states there is a reduction of pension benefits based on a ratio to money earned. Note that many states adjust their requirements on a yearly basis.
Alabama states that members may return to employment and continue to receive retirement checks if they work part-time and make no more than $1500 per month in the first year of retirement. In each year after the first year, members are limited to $18,000 per calendar year. If these restrictions are not observed, members' retirement checks are suspended. If members return to full-time employment, their retirement checks are suspended. Members are not allowed to contribute to the Alabama Retirement System (ARS) for two (2) years. After two (2) years, members may request reinstatement into the fund and pay salary earned. They pay for the two (2) years in which nothing was deducted at a five percent (5%) rate when they re-retire based on a new salary and new service. Members may elect not to have retirement withdrawn when they return to full-time employment. When these members retire, their retirement checks revert to the level prior to the full-time employment.
Alaska allows teachers who retire with a normal, unreduced benefit to return to work in a school district that has filed a resolution establishing a teacher shortage and adopted a policy penalizing their pension. Retirees must be separated from employment for a minimum of thirty (30) days. Alaska statutes prohibit teachers from making a contribution in the same school year they receive a retirement benefit.
Arizona has two forms of retirement: normal and early retirement. Normal retirement involves persons who are age sixty-five (65); age sixty-two (62) with at least ten (10) years of service; or who have eighty (80) points. Normal retirement members may return to work with an Arizona State Retirement System (ASRS) employer immediately without the twenty-one (21) day break required as long as they work less than twenty (20) hours per week. Retirees may work for nineteen (19) weeks full-time, over the twenty (20) hours per week in a given year. Then they must resume employment at less than twenty (20) hours per week in order for their pensions not to be affected. Members, at any time, can suspend their retirement benefit, earn at least five (5) months of service time, and may re-retire with a higher benefit. Members, who retire under early retirement, must be terminated from employment for at least sixty (60) days when the stipulations for employment listed above become effective.
Arkansas permits members to return to teaching but limits them to $22,000 per annum. Earnings over that amount create a reduction in retirement benefits of $1.00 for every $2.00 earned above the limit.
California permits retirees to accept full-time or part-time employment performing creditable service in the California Public School System; the law, however, limits the amount of money they can earn working for one school district or multiple districts. The earning's limitation is adjusted each year on July 1 by the amount of the increase in the California Consumer Price Index. The maximum amount California State Teachers' Retirement System (CalSTRS) can earn during the fiscal year from July 1, 2002, through June 30, 2003, is $23,540. Thus retirees must determine their limit of earnings each year. School districts must report all earnings paid to retirees. When retirees exceed the limit, CalSTRS will begin to deduct excess earnings from the monthly retirement allowance. This allowance must be reduced dollar-for-dollar by the amount of earnings in excess of the limit.
Colorado retirees cannot work on the first business day of the month they retire. For each day worked in the first month of retirement retirees are penalized five percent (5%) for each day or partial day worked. Following that first month, retirees can work up to 110 days or 720 hours per calendar year. There will be a reduction in benefit of five percent (5%) for each additional day worked.
Hawaii retirees are allowed to return to work in the public sector after a one (1) year separation. There is no limit on what they may earn, and retirees do not contribute to the pension system. There is no increase in their benefits once they retire again.
Idaho stipulates that retirees collecting a state pension must be terminated without promise of re-employment. After ninety (90) days, they may return to work at less than twenty (20) hours per week without stopping their benefits. If retirees work more than twenty (20) hours per week, the pension stops. As they accrue more service, they must contribute at the same rate as other active members, which is currently five and eighty-six hundredth's percent (5.86%) of salary.
Illinois annuitants of the Teachers' Retirement System (TRS) may return to a TRS contributing position for 120 days or 600 hours during any school year and still receive their TRS pension. They cannot return to the same position in the same school year in which they last contributed to the system. Annuitants must be out-of-service with the same employer for at least thirty (30) days. They do not contribute to the TRS if they stay within the guidelines. If they exceed the post-retirement employment limitations, they become active contributing members at nine percent (9%), and their pension ceases.
Louisiana allows retired teachers to return to work if their service has been severed for one (1) year. Retirees pay eight percent (8%) into the Louisiana Teachers' Retirement System; however, it is refunded once retirees stop working.
Maine retirees may return to employment covered by the Maine State Retirement System (MSRS) the first of the month after their termination date. Effective September 21, 2001, the legislature repealed the law that had an earnings limitation on retirees' salaries. There is no impact on the retirees' service retirement benefits if retirees are re-employed in public sector work. The repeal also means that retirees may not further contribute to the system, cannot accrue additional service time and will not be eligible for the MSRS disability and survivor benefits coverage provided to non-retired teachers.
Maryland permits retired teachers to return to work for an employer other than the county from which they retired without a limitation to earnings. They may earn as much as they wish, and it will not affect or offset their pensions. After ten (10) years of retirement, all restrictions are lifted. (This provision became effective July 1, 2001.) If retirees choose to return to work with their last employer, they may still not have a limitation on earnings if they qualify for the Retire/Rehire Program. This program allows certified teachers to return to work as a teacher at any school that has been deemed reconstituted or has a shortage of teachers in a specific subject area. This qualification is determined by the local board of education. If members retire on service retirement, there is no waiting period before they may return to work. If members retire under early service (reduced benefit), they must be retired a full year before the above rule takes effect. It is not possible to earn another pension, or increase their present one; there is no re-enrolling in the system through contributions. Retirees are always required to notify the retirement board in writing of their intent to resume employment.
Massachusetts retirees may return to public sector employment without having their pension affected under the following guidelines: There is no waiting period for members who retired at eighty percent (80%), or are sixty-five (65) years of age or older to be re-employed. Those educators who have not retired at eighty per cent (80%) or who are under the age of sixty-five (65) must separate from service for at least two (2) months before they can be re-employed. Under Retirement Plus there is a two-year waiting period.
Once they are re-employed, retired educators are subject to certain income restrictions. The annuitants can earn the difference between their pension benefits and the salary that would have been paid to them had they not retired. Should there be a critical shortage in their position, then the waiting period is waived. The salary stipulation is also waived, and they may earn a full salary without affecting their pension. Retirees do not contribute to the Massachusetts Retirement System, and there is no increase in their pension benefits once they re-retire.
Michigan states that under certain scenarios, retirees of the Michigan Public School Employees Retirement System (MPSERS) may return to work in a public school without impact on their pension. Typically, they are subject to a post-retirement earnings limit if they return to work in a Michigan public school. The pension is reduced dollar-for- dollar if retirees exceed their limit. They must be retired for a minimum of one (1) calendar month before returning to public employment. No contributions are made if retirees return to work. Additional credit earned will not result in pension recalculation unless specific criteria are met. If retirees return to work for a minimum period of time, three (3) or five (5) years, they may purchase additional service credit resulting in a recalculation of their pension.
New Mexico has a new program that began on January 1, 2002 called Return to Work (RTW). It allows educational employees who have retired to return to work full-time and receive retirement benefits. They must be free from all types of employment under the Employee Retirement Board (ERB) including volunteering in a position that was previously funded or will be funded. The district decides whether it will participate in the program. No additional service credit can be used toward enhancement of the existing pension. In addition to the RTW program, New Mexico allows retirees to remove themselves from retirement, return to work, and earn more service credits. In this way they qualify for a higher benefit when they re-retire. There is a third option under the state's educational retirement act that allows a member to earn up to $10,000 or the equivalent of one-fourth (1/4) of a full-time position in a fiscal year. Under this provision, the retirement benefit is not affected, and retirees do not have to contribute to the retirement fund.
New York has three different sections of laws regulating return to work for retired teachers. Retirees of the New York State Retirement System may return to New York State (NYS) public employment under the provisions of Section 211 or 212 of Article 7 of the New York State Retirement and Social Security Law and still receive full retirement allowance. Alternatively, under Section 503.11 of the New York State Education Law, retirees may return to work with their retirement allowance suspended.
An individual retiree may accept occasional work with the home district as long as the member's total calendar year income from NYS public employment does not exceed $20,000. If the Education Department eventually issues an exemption for employment with the home district, a member's calendar year earnings would be limited to the difference between one's maximum retirement allowance and the amount one would now be receiving in the position from which one retired. Generally, the Education Department will not issue an exemption for retirees to return to their home district until at least six (6) months after retirement.
If retirees expect to earn more than the Section 212 limit (currently $20,000), they may choose to be employed under Section 211. Under this section they may return to work with an employer other than a former employer and earn an unlimited amount. They may also return to work for a former employer and earn up to the difference between their maximum retirement allowance and their Final Average Salary or their final salary whichever is greater. Should the employer be unable or not wish to obtain approval for employment under Section 211, retirees may be employed under Section 503.11 with their retirement allowance suspended during the period of employment. Under Section 503.11 they may be restored to membership during the first year in which the retirement allowance is suspended. Restoration of membership during the second year is mandatory. If they render the equivalent of two (2) years full-time service under new membership, they would be eligible for an additional benefit based on the two (2) years of service. If they render a minimum of five (5) years of service under new membership, they may be eligible for a recalculation of their retirement allowance based on the first membership and the new membership. They would be required to pay to the system the actuarial equivalent of the pension they had received since retirement.
Oregon retirees receiving a public service retirement allowance may be employed by a participating employer without loss of benefits if the period(s) of employment by one (1) or more participating public employers does not exceed 1,039 hours per calendar year. Retirees can return to work immediately. If they exceed 1039 hours within the first six (6) months, they are required to pay back all their benefits to the state. If retirees work over 1039 hours per calendar year, their retirement benefit will cease, and they will again become a contributing member at a rate of six percent (6%) of their gross salary. They can re-apply for retirement. The contribution may increase their pension.
Rhode Island retirees may be re-employed on a limited basis, subject to post-retirement statutes that may change yearly. Currently, with limitations, retirees can return to teach for a maximum of ninety (90) days in a school year in a substitute position, or they can also be hired, with restrictions and prerequisite certification of the position having been posted for filling with a non-retiree, for up to ninety (90) days or in a position less than half (1/2) time. Retirees can also teach at a state school or college in Rhode Island as long as wages per calendar year do not exceed $12,000. Retired teachers cannot contribute to the pension fund and do not earn any additional service credit.
South Carolina states that if members have been retired for at least sixty (60) days, they may return to work for an employer covered by the South Carolina Retirement System and earn up to $50,000 per fiscal year without affecting their retirement annuity. If members exceed this limit and continue to work, their retirement annuity will be discontinued for the remainder of the fiscal year. If members return to covered employment prior to sixty (60) days after retirement, their retirement annuity will be suspended while they remain employed by a covered employer. Retirees neither contribute to the fund nor are their benefits changed once they re-retire.
Texas legislation passed in 2001 allows members who retired before January 1, 2001, to return to work without restriction or reduction in benefits. Members retiring after January 1, 2001, must be rehired in the month following their retirement. Service retirees may work in a Texas public educational institution without affecting their annuity payment under the following conditions: as a substitute at no more than the employer's daily rate of substitute pay for an unlimited number of days during a school year, or on a one-half time or less basis during any month. (One-half time means employment during any month on as much as one-half the full-time load. It cannot exceed fifty percent (50 %) of the full-time position or ninety-two (92) clock hours whichever is less.) Retirees may work on a full-time basis up to six (6) months providing this employment is performed at the beginning of the school year after the retirement date. Working any part of a month counts as a full month. Working as a substitute or on a one-half basis or less will be included as part of the six (6) months. Retirees may return to work as principals and assistant principals on a full-time basis if certified and with a twelve (12) month break in service. This provision excludes early age retirees. Retirees who go beyond the guidelines will forfeit annuity payments in excess of the limit. During employment after retirement, retirees cannot earn additional service credits, and Texas Retirement System contributions cannot be due on amounts earned.
Vermont stipulates that retirees collecting a Vermont state pension who return to work as teachers may earn no more than fifty percent (50%) of the current average teachers' earnings or work more than the maximum period for substitute teachers. If retirees exceed these guidelines, retirement benefits will be "frozen." The benefits earned after re-employment will be added to the previous "frozen" benefit. When they retire again, both the "frozen" and any new benefits will be paid. Any previous optional election will remain in effect for the "frozen" benefit. The retirees can elect a new option for the additional benefit.
Virginia permits retired teachers to return to work without interruption of their retirement benefits after receiving the benefits for at least thirty (30) days. Retirees are not allowed to continue contributions to the fund, and there is no increased benefit to the pension as a result of this re-employment.
Washington allows retired teachers to return to work, but depending upon the plan in effect, retirees may work either to 867 or up to 1500 hours per school year. If they exceed these hours, the pension is suspended for the remainder of the school year. It is restarted at the beginning of the next school year. Members must be retired one full calendar month to be eligible for re-employment, and as retirees do not contribute to the pension plan.
West Virginia states that retirees, other than college teachers, who accept employment that is not permanent or regular for a period of no more than 120 days during the school year, are considered temporary and shall continue to receive normal monthly benefits. Retirees may teach up to seven (7) semester hours and still be considered temporary employees.
CATEGORY THREE
STATES THAT HAVE DIFFERENT APPROACHES
TO PUBLIC SECTOR RE-EMPLOYMENT
The issue of rehiring is handled by states in a variety of ways. Because of teacher shortages most states have permitted retirees who collect a state pension to return to public sector jobs. Such re-employment presents a problem to the respective retirement systems because of the loss of revenue from contributions. Most states do not permit retirees to contribute to the public pension system once retired. The states in this section address the teacher shortage issue while preventing the loss of revenue to the state retirement system.
Connecticut retirees have certain restrictions placed upon their school employment depending on whether it is a part or full-time position. Retired teachers may be employed in a temporary position and earn a maximum of forty-five percent (45%) of the entry level salary established by the school district for the position for which they are hired during any school year, July 1 through June 30. Once they elect to go beyond the forty-five percent (45%), their pension ceases. This limitation applies to all positions which constitute part of the Connecticut K-12 and higher public education system and that pay into the Connecticut Teachers' Retirement System (CTRS). It does not apply to positions that do not contribute to the CTRS. Knowing that their retirement pension will be discontinued, retirees may choose full-time re-employment for six (6) months or longer. They may elect to contribute into the CTRS at a reduced six percent (6%) rate instead of the seven percent (7%) rate of active teachers. The contribution would be based on the salary that they are entitled to receive at the appropriate salary level. All monies contributed, along with accrued interest, will provide an additional annuity based on age at the time retirement benefits resume. The annuity provided by CTRS is equivalent to three (3) times the benefit amount derived from contributions.
Florida allows retirees to be re-employed without restriction after a twelve (12) month waiting period. Members who elect to return during the restricted period will be subject to benefit suspension unless two criteria are met. Retirees may be hired for exclusionary positions that include part-time, non-contractual substitutes or hourly positions, paraprofessionals, transportation aides, bus drivers, or food service workers; service must be limited to 780 hours. If hours are exceeded, retirement benefits must be suspended for that month and remaining months of the restricted period. Because Florida is a non-contributory state, neither active nor rehired retirees pay into the retirement plan. Retirees, who return to positions covered by the Florida Retirement System (FRS), accrue service toward a second-career retirement benefit.
Georgia has a number of stipulations regarding retirees. Teachers' Retirement System of Georgia (TRSGA) retirees can teach full-time pre-kindergarten through grade twelve (12) and continue to receive their monthly retirement benefit under the following conditions: They must have retired on or before December 31, 2001, with at least thirty (30) years of service, or after attaining age sixty (60). They return to teaching in a "qualified" school, which is a school rated as D or F by the Office of Education Accountability (OEA), listed as Title I, or have fifty percent (50%) or more of the students failing to meet OEA standards. They can return to classroom teaching for a maximum of five (5) years without loss of benefits. Administrators, counselors, librarians, and other educational specialists can only be re-employed as classroom teachers. Retirees will not be eligible for employment benefits offered by the employer, nor will they contribute to TRSGA. No additional service credit will be accrued. Retirees will receive the normal rate of pay for classroom teachers; they must be re-employed annually and do not retain tenure rights. School systems are limited to hiring up to one percent (1%) of the total number of teachers or ten (10), whichever is greater and they must pay employer contributions to TRSGA for retirees they employ. No later than the date of employment, employers hiring TRSGA retirees under the above conditions, must submit an employment verification form to TRSGA as well as certification from the State Department of Education that the schools where the retirees are employed meet the qualified school criteria.
Indiana stipulates that retirees under the age of sixty-five (65) may return to work after ninety (90) days of retirement, but they may not receive more than $25,000 in salary per year without stoppage of benefits. There is a three percent (3%) contribution paid to the retirement fund by the school on retirees' behalf. It will not increase the pension and will be returned in a lump sum to the retirees once employment is terminated.
Iowa allows retired teachers to return to work after one calendar month in a non-covered employment, and after four calendar months in a covered employment without losing their pensions. Under age sixty-five (65), retirees are subject to a $30,000 per year earning limit. There is no limit over age sixty-five (65). If they return to covered employment, they must contribute three and seven tenths percent (3.7%) into the system, which may increase their benefits. They also have the option of taking a lump-sum refund of both their investment and the employer's contribution.
Kansas allows re-employment of retirees of the Kansas Public Employee Retirement System (KPERS) after thirty (30) days. Restrictions are imposed depending on the location of employment. If retirees return to the district from which they retired, their employment is limited to $15,000 in one calendar year. If retirees elect to teach in another district, there is no salary restriction. Rehired teachers may not contribute to the KPERS.
Kentucky offers several options for retired teachers who choose to return to work. There is a waiting period from three (3) to twelve (12) months depending on the option elected. If retirees choose to stop collecting their pensions, they can increase their retirement benefit by making additional contributions to their original account or start a second account and make nine and eight hundred fifty-five thousandths percent (9.855%) contributions for a second benefit. All retirees who return to work must pay into the retirement plan.
Minnesota has a retirement earnings amount that is announced on a periodic basis. In the year an individual turns 65 they are subject to an earnings limitation of $30, 720 for income earned in the months preceding their sixty-fifth (65) birthday. Earnings limitations for those sixty-five (65) and older have been eliminated. Members age sixty-four (64) or younger may earn $11,520. For those who exceed the earnings limitation, pension benefits are reduced by $1.00 for every $2.00 of earnings over the limit. Legislation passed in 2000 allows the withheld benefits to be placed in a special account for the member. At age sixty-five (65), or one year after their re-employment concludes that gave rise to the limitation, retirees may apply for a lump-sum payment of withheld pension benefits, plus six percent (6%) interest.
Mississippi permits retirees to be employed in a public sector position after forty-five (45) days. Compensation is based on whether the employment is half time or more. Retirees, who are rehired for a half-time position, are paid half the salary of an active teacher in that position. Those retirees, who work more than halftime, are paid up to twenty-five (25%) of their average compensation that was used to calculate their retirement benefit. If employed within these guidelines, members continue to receive monthly retirement benefits. Those members who choose to work for the Public Employee Retirement System (PERS), outside the above guidelines, will have their benefits suspended. Benefits will resume when employment is terminated and the retirees reapply, or work resumes within the guidelines. Retirees who work within the guidelines do not pay into the PERS. Retirement benefits will not change as a consequence of re-employment.
Missouri has a time and earnings limitation for all re-employed retired teachers. Retirees may work in a temporary substitute position or on a part-time basis in any capacity for an employer of the Public School Retirement System (PSRS) of Missouri for a maximum of (550) hours in one (1) school year and retain retirement benefits. Retirees, however, may not earn more than fifty percent (50%) of the annual salary of the position according to the district's salary schedule and their level of experience and education. If employment falls outside these guidelines, retirement benefits will cease until employment ends or a new school year begins. Full-time re-employment will also require a cessation of benefits beginning with the month service commences. These retirees will contribute to PSRS at the current ten and five tenths percent (10.5%) rate under a new membership. After one (1) or more years of credit under the new membership, retirees will be eligible for an additional benefit based on service that occurred after the first retirement. Rehired teachers' service acquired during the two memberships cannot be combined into a single calculation of benefits.
Montana has no waiting period for the rehiring of retired teachers. Retirees may be employed in part-time positions in the Montana Teachers' Retirement System (MTRS) without loss of retirement benefits under the following conditions: compensation must not exceed the greater of either one-third (1/3) the sum of their Average Final Compensation (AFC) including annual increases equal to the increase in the Consumer Price Index (CPI), or one-third of the median AFC for members retired during the preceding fiscal year as determined by the TRS board. These earnings are based on the fiscal year, July 1 through June 30. Retirees may begin re-employment immediately. They make no contributions to the TRS unless they exceed the amount they are eligible to earn. Should retirees exceed their earnings limitation, their monthly retirement benefit will cease the first of the month in which their earnings for the fiscal year exceed the maximum allowed. Retirees shall be reinstated to active membership status. Benefits will not be reinstated until members terminate employment.
If retirees are reinstated to active membership, all service credited at the time of their retirement will be restored in full to their account. Members will not be required to repay any benefits they have received. If members are re-employed full-time for at least one (1) year, the members' monthly benefit will be recalculated at the time they terminate and reapply for retirement benefits based upon the additional service credit earned while active members. If members are not re-employed full-time for at least one (1) year, they will be reinstated to retired status with the same benefit and option they were receiving before returning to work.
Nebraska requires that retirees be separated from service for a period of 180 calendar days following retirement before returning to work. When retirees are rehired, they begin contributions to the Nebraska Retirement System (NRS) at the same rate as other members, which is seven and twenty-five hundredths percent (7.25%) of gross compensation. Once back in the plan, retirees begin to accrue years of service toward a possible second benefit or may opt to cash out contributions made at this time.
Nevada allows retirees to return to work with a Nevada public employer if they accept employment in a position that does not qualify for membership, or are elected in a position for which they have not earned prior service. Provisions are also in place to allow retirees to fill "critical need" positions without forfeiting their pension for the duration of employment. Retirees cannot accept employment in a position that is not eligible for membership in the Public Employee Retirement System (PERS) for the first ninety (90) days of retirement. There is a no waiting period for retirees going into elective office or accepting "critical need" employment. When retirees return to a PERS position for a minimum of six months and contribute to the system, their pension will be increased; if less than six (6) months, contributions will be reimbursed.
North Carolina states that retirees who are re-employed in a position that requires membership in the retirement system from which they retired will have their retirement payment stopped on the first day of the month following the month of re-employment. They will again become contributing members the same month the payment is terminated. When they become members of the same retirement system and contribute for at least three (3) additional years, they can change the retirement payment plan and/or beneficiary selected at the time of original retirement. For any length of re-employment in the same retirement system, their retirement benefits will be greater at the time of the second service retirement. If they are re-employed on a part-time, interim, temporary, or contractual basis, or are otherwise engaged to perform services on any basis that does not require membership in the retirement system from which they retired, their retirement payment will be stopped if earnings during any calendar year are greater than $23,600, or fifty percent (50%) of compensation, excluding terminal payments, reported to the Retirement System during the twelve (12) months of service preceding the effective date of retirement. The above amounts are raised on January 1 of each year by the percentage increase in the Consumer Price Index. Retirement payments will be stopped on the first day of the month following the month when earnings exceed the greater of the two stated limits. Retirement payment will resume on January 1 of the year after benefits are stopped.
North Dakota permits retirees to return to work after thirty (30) days and to work a maximum of 700 hours under the General Rule. Legislation is presently filed to allow the 700 hours to apply to a nine (9) month contract and to increase by 100 hours for each additional month. Substitute teaching and extra-curricular duty hours do not count in the limit.
North Dakota also has two other provisions that allow retirees to return to work without loss of benefit. If retired for at least one (1) year, retirees can return to teach over the hour limit in the General Rule in a "critical shortage" area. Another option is that retirees can return to teach full-time, for one year only, in any position without loss of benefit if they donate half of their salary to an educational foundation. Employer and employee contributions of seven and seventy-five hundredths percent (7.75%) each are paid to the North Dakota Teachers' Fund For Retirement (TFFR) on the full salary. If retirees exceed the hour limit under the General Rule, their benefits are suspended and they do pay in contributions in this case. Upon re-retirement the benefit is adjusted a variety of ways depending on the length of re-employment.
Ohio allows retired teachers to return to work without penalizing their pension after a two (2) month waiting period. Both retirees and active teachers pay nine and three tenths percent (9.3%) into the pension system. It does not increase the retirees' pension. Rather, they pay in on a separate annuity-based pension which is payable at sixty-five (65) or upon completion of service, whichever is later.
Oklahoma retired teachers may return to the public schools of Oklahoma after sixty (60) days. They are limited to earning $15,000 per calendar year. Teachers returning to employment after retirement do not have to pay into the retirement system. If retired teachers wish to stop receiving retirement checks and contribute for one (1) full year, they can add a year of service and increase their retirement benefit. Teachers from other states can teach in Oklahoma without contributing to the teachers' retirement system if they are over age fifty-five (55). If they wish to be a contributing member, they pay seven percent (7%) of their total salary plus benefits.
South Dakota stipulates that Class A members of the South Dakota Retirement System (SDRS) who retire without a reduction in benefits (have met the Rule of 85) and who later return to SDRS covered employment as permanent full-time members will continue to receive initial retirement benefits. For those members who retire with a reduction in benefits and return to work, their SDRS retirement benefit is suspended. There is no governing statute in the state that formally specifies the length of time they must be retired before resuming SDRS covered employment. Because SDRS, however, is a 401(a) plan, a true termination or separation of service must occur for benefits to commence and to continue in situations where a retire/rehire occurs within the same employer unit. Members returning to said employment, as permanent full-time employees are required to participate in the system by contributing at the same rate as members still actively teaching. If they return for a year or more on a permanent full time basis, their additional years of service are used to calculate a "tack-on" benefit. If less than one (1) year, members may receive a refund of the accumulated contributions from that period.
Tennessee retired teachers can return to work in a temporary position without loss of retirement pay after being "off payroll" for sixty (60) days. They can work for 100 days in a twelve (12) month period. Also, after one (1) year of retirement, they can return to a full-time teaching position and receive no more than eighty-five percent (85%) of the salary of a teacher with the same experience and education. Retirees who return to full-time or temporary jobs will pay into the Tennessee Consolidated Retirement System.
Utah states that retirees must be retired from a school district for six (6) months before being allowed to return to work. Members, however, can retire from one school district and return to work immediately for another school district. If they return to work, the district must pay the retirement contribution amount for the defined benefit plan of ten and four tenths percent (10.4%) of salary changing to eleven and seven tenths percent (11.7%) as of July 1, 2003 into a defined contribution plan on members' behalf. These contributions do not change the retirement benefit.
Wisconsin retirees who are members of the Wisconsin Retirement System (WRS) can retire, seek re-employment and return to a covered position under the WRS after a thirty (30) day break in employment.
Upon returning to work, employees have two (2) coverage options. If employees want to continue their annuity, they are not covered; and the employer pays no contributions to the WRS. If employees opt for coverage, they file a form to elect coverage under the WRS, and their annuity is terminated. Coverage begins the first month following receipt of the form.
Contributions are paid only if retirees elect active coverage. The contributions are the same for all teachers who are covered: five and four tenths percent (5.4%) for employees and four percent (4.0%) for the employer.
Wyoming stipulates that if retirees have received at least six (6) checks from the Wyoming Retirement System (WRS), or will be working less than twenty (20) hours per week, they may elect not to contribute to the retirement system. If retirees do not meet these criteria, they are required to stop their benefit and begin to make contributions again to the WRS. If retirees elect to contribute to the plan, it may increase their benefit when they retire a second time. The two employment periods are combined, and a new benefit is calculated. The new benefit is then decreased actuarially based on the amount the members have already received from their first retirement. The amount the members contribute to the plan is the same five and fifty-seven hundredths percent (5.57%) as active teachers.
A CASE IN POINT
Our research indicates that retiring and immediately returning to work in the public sector is one that concerns many states. Texas is a case in point because it illustrates some of the problems this issue creates.
Senate Bill 273 which was passed by the Texas Legislature in 2001, stipulates that a retiree of the public pension plan who retired prior to January 1, 2001, is allowed to return to work as a teacher/principal in a critical subject area as determined by each school district without loss of benefits. Individuals who retire after that date must have a twelve (12) month separation from service prior to returning to public employment.
A Texas legal opinion determined that SB 273 applied only to school districts, but not to private employment agencies. As a result, a private company was formed which encourages individuals to retire, go to work for the company, which in turn contracts them back to the school district for a fee without any waiting period.
One consequence of this action is that people are retiring sooner, collecting their full pension, returning to public sector work and earning a salary and not contributing to the retirement pension fund. This trend seems to threaten any future cost-of-living increase to current and future retirees. This issue relates to the possible impact on "normal costs" of financing the pension system. A normal cost, which is the state method of funding future retirees, now exceeds the guaranteed income of the shared contributions of the state and employees. This shortfall will have a major impact on future annuity increases and program improvements.
With individuals retiring earlier than they would have without this incentive, retirees are being paid over a longer time period. Neither the member nor the state contributes to the retirement system. One positive impact is that the retiree's annuity is less due to earlier retirement. The Teacher Retirement System of Texas (TRS) actuary reports that this one positive impact of receiving a lower annuity is significantly offset by two negative: paying a retiree over a longer period of time and the fact that neither the member nor the state is contributing to the retirement fund. Based on projections provided by TRS actuaries, there are indications that an immediate return to work would increase the unfunded liability by $5.5 billion, would raise normal costs by one and twenty-eight hundredths percent (1.28%), and could never be funded at the current level of state contributions - six percent (6%) state and six and four tenths percent (6.4%) employee. The delay of one (1) year before being allowed to return to work would not have this actuarial impact on the system primarily because large numbers would not be retiring sooner.
The purpose of the teacher retirement system is to serve as a pension trust fund for retirees. Retiring earlier and returning to work does not solve the teacher/principal shortage; it may, however, extend some individual's work years. The Texas Retired Teachers Association and Texas Retired School Administrators are jointly studying the issues.
There are existing opportunities under certain TRS laws and rules that retired teachers/principals can return to work after a one (1) month break in service without serious adverse impact on the Teacher Retirement System.
Submitted by Michael Lehr
SUMMARY OF BACK TO WORK
This section addressed a topic of great importance in a number of states. The information came from many sources, the teachers' retirement boards of individual states, web pages of state retirement systems, and the Department of Education of some states. Wherever possible the words of those reporting sources have been used.
Most contacts were made via e-mail addresses found in links with retirement boards. The following sites allow one to link to numerous states:
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http://www.retirementsecurity.org/Links/lin_OtherSystems.htm
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http://benefitsattorney.com/states.html
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http://www.state.ne.us/home/pers/publicret.htm
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http://www.trsl.state.la.us/links/otherst.html
In addition contacts were made directly to the Executive Directors of the Teachers Retirement Systems in various states through e-mail addresses provided in the National Council on Teacher Retirement Membership Directory.
Retirement issues are complex and continually evolving. The material in this book is not intended to be an exhaustive study on any subject. The research was selected for the following reasons: