Tom Curtis and former (appointed) STRS Board member Steve Buser re: The 35 year/88-1/2% rule for calculating pension benefits
(Best to read from the bottom up.)
Steve Buser to Tom Curtis, June 19, 2009
Subject: RE: 061909 Buser, Re: 061909 STRS 88-1/2% Rule
No problem at all sharing my views. And thanks for the kind words.
From Tom Curtis, June 19, 2009
Subject: 061909 Buser, Re: 061909 STRS 88-1/2% Rule
Thank you again Stephen,
I appreciate your comments, as I feel you have the background and knowledge to fully understand the complicated operation of the STRS. I wish you had been able to remain on our board for a longer period of time then you did. However, by knowing you for just that brief period of time, I came to appreciate your candor and willingness to explain important issues such as this one.
You must have been a good educator, as I now have a better understanding of the many varibles that would need to be considered when determining the current viability of the 88-1/2% rule. Do you mind if I share your comments with others?
Tom Curtis
From Steve Buser, June 19, 2009
Subject: RE: 061909 Buser, Re: 061809 STRS 88-1/2% Rule
If that is what Bob meant, I would want to know how he accounted for the fact that STRS does not have to pay out anything during the years that retirement is deferred.
To illustrate the point, I retired with 30 years credit. At 2.2% per year, that meant I could draw 66% per year. (The actual amount depends on the selection of survivor benefits, but let's ignore that.) If I had waited 5 years, I could have retired with a benefit of 88 1/2% per year. Hence the enhanced benefit, or 88 1/2% versus 66%, would have been 22 1/2% per year. To get the enhanced benefit, I would have given up five years of benefits. If we ignore the 3% annual increase in STRS payouts and potential increases in my final average salary, I would have given up 5 times 66%, or 330% of my FAS to get 22 1/2% per year for as many years as I live. Without taking acount of the timing of the payments, I would have had to live roughly 15 years to break even. However, given that the lost benefits are up front, and the increased benefit is deferred into the future, the present value of the enhanced benefit would not catch up to the up front cost of 330% unless I live well beyond my expected life span.
But as I said in the earlier email, STRS would have gotten the savings from deferred retirements for many members even if they had not increased the benefit formula. So depending on the actuarial assumptions used to project future retirements with and without the enhancement, the result can be a net loss for the system as a whole.
As for Nehf, I never met him. But I do not envy anyone taking over after Damon. Damon wasn't perfect. But he knew the system, and he managed to stay on top of things pretty well despite the fact that during his term STRS never filled the position of assistant, which Damon held prior to taking over the top spot. That meant Damon had to do two jobs at the same time during a period of many challenges.
From Tom Curtis, June 19, 2009
Subject: 061909 Buser, Re: 061809 STRS 88-1/2% Rule
Hello Steve,
Thank you kindly for responding. You have always been willing to help me understand what has been stated.
First, I am premature in passing this information along, as Slater stood up and made this statement during this weeks board meetings. So, please do not pass this along until it has been clarified.
Second, Slater indicated that this cost difference was the amount of difference between the 88-1/2% rule and simply paying 2.2% per year, if I am correct. Again, this needs to be clarified by Bob Slater.
Dennis Leone, who will be leaving the board in August, will soon have a statement about such going out.
Steve, our retirement system is in real trouble. Mike Nehf has been telling retirees at local RTA meetings that vested pensions cannot be reduced. Dennis has been telling him he should not be making such statements. Last Friday in Sidney, Ohio at a townhall meeting, he finally did indicate that yes, vested pensions may in fact need to be reduced. What has become fo the integrity of the leadership of this country?
Tom Curtis
From Steve Buser, June 19, 2009
Subject: RE: 061809 STRS 88-1/2% Rule
This is a tricky question. Depending on how you phrase it, either answer can be correct !
The cost neutral answer is based on the fact that for an individual member who defers retirement, the amount STRS saves by not having to pay any benefits during the period of deferral is more than the value of the enhanced future benefits when the member does eventually draw the higher benefit.
The catch is that some members would have deferred retirement even without the enhanced formula. At Ohio State, for example, one of my former colleagues just died at age 80 without ever retiring. STRS collected contributions from him for 50 years and never had to pay out a dime to him.
I assume Bob Slater was talking about an exercise in which actuaries guess how many members would have retired each year with and without the enhanced benefit. If the actuaries guess that most of those who defer retirement would have done so anyway, they will conclude the system is worse off. But all of the "loss" is money that specific members contribute but never collect as a benefit.
As for the specific estimate of one billion dollars, I don't recall seeing that. However, I assume it is not the amount of enhanced benefits that have already been paid out but instead also includes an estimated of future enhanced benefits STRS will pay out in excess of estimated additional savings STRS will earn if more members defer retirement than would have deferred under the old system. But the main point is that all of the money we are talking about comes contributions from those members who defer retirement. So there is also a question of whose money that really is any way.
Sorry for adding to the confusion. But as I said, this was a tricky point, and I never did manage to figure out which side I was on. In one sense, it seems fair to give specific contributions to specific members, but when we do that, the system as a whole is worse off. For example, we could make the system better off for future retirees by reducing health care benefits for current retirees like you and me. But should STRS do that? For what it is worth, I eventually decided that as long as the money was going to members and a reasonable case could be made that those members had contributed to the benefit in question, then I hoped that the payout was reasonable. However, as I say, I never really figure this one out.
From Tom Curtis, June 18, 2009
Subject: 061809 STRS 88-1/2% Rule
Hello Steve,
I hope all is well with you and your family.
I am writing to pass along some information that I heard today at the STRS and would ask for your thoughts on such.
Dennis Leone stated to a large group of retirees during lunch, that Bob Slater has stated that the 88-1/2% rule is not cost neutral, as it has always been touted to be. Further, he stated that the cost to the pension fund has actually been 1 billion dollars to date.
I know you took a look at this while you were on the board. I believe there was also a report presented by Kim McNichol (?) that indicated that it was in fact cost neutral.
Would you care to express your thoughts about this? Of course, I would expect you to confirm this information with Mr. Slater first.
I look forward to your response,
Tom Curtis
Steve Buser to Tom Curtis, June 19, 2009
Subject: RE: 061909 Buser, Re: 061909 STRS 88-1/2% Rule
No problem at all sharing my views. And thanks for the kind words.
From Tom Curtis, June 19, 2009
Subject: 061909 Buser, Re: 061909 STRS 88-1/2% Rule
Thank you again Stephen,
I appreciate your comments, as I feel you have the background and knowledge to fully understand the complicated operation of the STRS. I wish you had been able to remain on our board for a longer period of time then you did. However, by knowing you for just that brief period of time, I came to appreciate your candor and willingness to explain important issues such as this one.
You must have been a good educator, as I now have a better understanding of the many varibles that would need to be considered when determining the current viability of the 88-1/2% rule. Do you mind if I share your comments with others?
Tom Curtis
From Steve Buser, June 19, 2009
Subject: RE: 061909 Buser, Re: 061809 STRS 88-1/2% Rule
If that is what Bob meant, I would want to know how he accounted for the fact that STRS does not have to pay out anything during the years that retirement is deferred.
To illustrate the point, I retired with 30 years credit. At 2.2% per year, that meant I could draw 66% per year. (The actual amount depends on the selection of survivor benefits, but let's ignore that.) If I had waited 5 years, I could have retired with a benefit of 88 1/2% per year. Hence the enhanced benefit, or 88 1/2% versus 66%, would have been 22 1/2% per year. To get the enhanced benefit, I would have given up five years of benefits. If we ignore the 3% annual increase in STRS payouts and potential increases in my final average salary, I would have given up 5 times 66%, or 330% of my FAS to get 22 1/2% per year for as many years as I live. Without taking acount of the timing of the payments, I would have had to live roughly 15 years to break even. However, given that the lost benefits are up front, and the increased benefit is deferred into the future, the present value of the enhanced benefit would not catch up to the up front cost of 330% unless I live well beyond my expected life span.
But as I said in the earlier email, STRS would have gotten the savings from deferred retirements for many members even if they had not increased the benefit formula. So depending on the actuarial assumptions used to project future retirements with and without the enhancement, the result can be a net loss for the system as a whole.
As for Nehf, I never met him. But I do not envy anyone taking over after Damon. Damon wasn't perfect. But he knew the system, and he managed to stay on top of things pretty well despite the fact that during his term STRS never filled the position of assistant, which Damon held prior to taking over the top spot. That meant Damon had to do two jobs at the same time during a period of many challenges.
From Tom Curtis, June 19, 2009
Subject: 061909 Buser, Re: 061809 STRS 88-1/2% Rule
Hello Steve,
Thank you kindly for responding. You have always been willing to help me understand what has been stated.
First, I am premature in passing this information along, as Slater stood up and made this statement during this weeks board meetings. So, please do not pass this along until it has been clarified.
Second, Slater indicated that this cost difference was the amount of difference between the 88-1/2% rule and simply paying 2.2% per year, if I am correct. Again, this needs to be clarified by Bob Slater.
Dennis Leone, who will be leaving the board in August, will soon have a statement about such going out.
Steve, our retirement system is in real trouble. Mike Nehf has been telling retirees at local RTA meetings that vested pensions cannot be reduced. Dennis has been telling him he should not be making such statements. Last Friday in Sidney, Ohio at a townhall meeting, he finally did indicate that yes, vested pensions may in fact need to be reduced. What has become fo the integrity of the leadership of this country?
Tom Curtis
From Steve Buser, June 19, 2009
Subject: RE: 061809 STRS 88-1/2% Rule
This is a tricky question. Depending on how you phrase it, either answer can be correct !
The cost neutral answer is based on the fact that for an individual member who defers retirement, the amount STRS saves by not having to pay any benefits during the period of deferral is more than the value of the enhanced future benefits when the member does eventually draw the higher benefit.
The catch is that some members would have deferred retirement even without the enhanced formula. At Ohio State, for example, one of my former colleagues just died at age 80 without ever retiring. STRS collected contributions from him for 50 years and never had to pay out a dime to him.
I assume Bob Slater was talking about an exercise in which actuaries guess how many members would have retired each year with and without the enhanced benefit. If the actuaries guess that most of those who defer retirement would have done so anyway, they will conclude the system is worse off. But all of the "loss" is money that specific members contribute but never collect as a benefit.
As for the specific estimate of one billion dollars, I don't recall seeing that. However, I assume it is not the amount of enhanced benefits that have already been paid out but instead also includes an estimated of future enhanced benefits STRS will pay out in excess of estimated additional savings STRS will earn if more members defer retirement than would have deferred under the old system. But the main point is that all of the money we are talking about comes contributions from those members who defer retirement. So there is also a question of whose money that really is any way.
Sorry for adding to the confusion. But as I said, this was a tricky point, and I never did manage to figure out which side I was on. In one sense, it seems fair to give specific contributions to specific members, but when we do that, the system as a whole is worse off. For example, we could make the system better off for future retirees by reducing health care benefits for current retirees like you and me. But should STRS do that? For what it is worth, I eventually decided that as long as the money was going to members and a reasonable case could be made that those members had contributed to the benefit in question, then I hoped that the payout was reasonable. However, as I say, I never really figure this one out.
From Tom Curtis, June 18, 2009
Subject: 061809 STRS 88-1/2% Rule
Hello Steve,
I hope all is well with you and your family.
I am writing to pass along some information that I heard today at the STRS and would ask for your thoughts on such.
Dennis Leone stated to a large group of retirees during lunch, that Bob Slater has stated that the 88-1/2% rule is not cost neutral, as it has always been touted to be. Further, he stated that the cost to the pension fund has actually been 1 billion dollars to date.
I know you took a look at this while you were on the board. I believe there was also a report presented by Kim McNichol (?) that indicated that it was in fact cost neutral.
Would you care to express your thoughts about this? Of course, I would expect you to confirm this information with Mr. Slater first.
I look forward to your response,
Tom Curtis
posted by Kathie Bracy at 11:12 PM
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