The Commonwealth Public School Employees Retirement System (PSERS) began by a statute in 1917. It started operations on July 1, 1919, and is one of the oldest pension systems in the country. Today, PSERS serves more than 600,000 members. PSERS’ assets were $53 billion on June 30, 2014.
PSERS is a defined benefit pension plan. The employer and employee fund the plan with contributions and investment earnings. PSERS is a qualified trust under section 401(a) of the Internal Revenue Service code. State law sets the PSERS benefit formula and the Commonwealth of Pennsylvania guarantees the benefits.
How your defined benefit plan works
Your employer withholds a percentage of your salary from your pay and submits it to PSERS. It is then posted to your retirement account. The interest on your contributions is guaranteed while you are an active contributing member of PSERS. Today, contributions in your account earn 4 % interest compounded annually. This rate is subject to change.
A Formula Determines Your Retirement Benefit from PSERS
A formula determines your retirement benefits. As a qualifying member, you are guaranteed to receive a lifetime monthly annuity when you retire. The PSERS formula for benefits is your years’ of service times your multiplier (2% or 2.5%) times your average three highest years of salary (defined as the highest average compensation during any three non-overlapping periods of 12 consecutive months). The product equals the maximum single life annuity you will receive.
Here is an example of an individual who is 62 years old with 25 years of service:
25 years of service x 2.5% x 50,000 (final average salary) = $31,250 (Annual Maximum Single Life Annuity)
You can reach normal retirement in three ways:
- 35 years of service, regardless of your age
- Age 60 with 30 or more years of service
- Termination at age 62 with at least one year of service
There are five types of retirement benefits in PSERS
- withdrawal early
- normal and disability retirement
A deferring retirement benefit allows an individual with five years of service to postpone retirement benefits until age 62. Under a normal retirement scenario, members are eligible to receive an annuity payout without any penalty in three instances. They are when they reach age 62 with one year of service; 35 years of service regardless of age; or age 60 with at least 30 years of service. Members who seek early retirement, but who were below normal retirement age, can receive an annuity reduced by a 3% penalty per year. To be eligible the member must be both 55 years of age and have at least 25 years of service. Less than age 55 or 25 years of service, the penalty increases as the age of the beneficiary decreases.
PSERS retirees have several retirement payment options available. With any of the options, a member may elect to receive all or part of the contributions and interest at the time of retirement.
Four Membership Classes
PSERS has four membership classes:
1. Class T-C,
2. Class T-D,
3. Class T-E,
4. Class T-F.
Your membership class, in part, decides your member contribution rate. The rate of the contribution you pay towards your account is based on the date you were hired and membership class. A law sets the member contribution rates. You cannot choose to lower or raise your contribution amount, unless your began employment after July 1, 2011, in which case you may select class T-F (2.5%) and raise your contribution rate to 10.3%.
Member Contribution Rates
A Class T-C member who enrolled in PSERS before July 22, 1983, has a contribution rate of 5.25%. A Class T-D member who enrolled in PSERS before July 22, 1983, has a contribution rate of 6.50%.
A Class T-C member who enrolled on or after July 22, 1983, will have a contribution rate of 6.25%. A Class T-D member who enrolled on or after July 22, 1983 will have contribution rate of 7.50%.
Those who become members for the first time on or after July 1, 2011, may choose between two classes of membership in PSERS, and therefore, two different base contribution rates.
New members electing Class T-E:
- The base member contribution rate is 7.50% with “shared risk” contribution levels that may shift between 7.50% and 9.50%.
New members electing Class T-F:
- The base member contribution rate is 10.3% (base rate) with “shared risk” contribution levels that may shift between 10.30% and 12.30%.
An Explanation of Shared Risk
With a “shared risk” program, Class T-E and Class T-F members benefit when investments of the fund are doing well and share some of the risk when investments under perform. With a Class T-E or Class T-F membership, your contribution rate will stay within the specified range (Class T-E – 7.50% and 9.50% or Class T-F – 10.30% and 12.30%).
It also may increase or decrease by 0.5% within the specified range once every three years, starting in July 1, 2015. Your member contribution rate will never go below the base rate or above the highest percentage rate. If however, if PSERS decides it is fully funded at the time of the comparison, your member contribution rate will revert to the base employee contribution rate for your membership class.
Learn more at www.psers.state.pa.us
We have just touched on the highlights of the PSERS defined benefit plan.
Retiring can be overwhelming. That’s why it is important to work with a Kades-Margolis Financial Advisor. He or she can help you navigate through the plan’s complexities and help you understand your options.
If you would like more information, please call Kades-Margolis at
(800) 433-1828, ext. 4. You can also email us by clicking here. We will have one of our advisors contact you.