JOEL L. FRANK
Retirement Analyst
PO Box 148
Marlboro, New Jersey 07746-0148
(732) 536-9472
New Jersey’s public employEEs are under the mistaken belief that their mandatory 5 percent contribution to their Annuity Savings accounts provides only a fraction of their lifetime pensions. On the contrary, a simple analysis reveals that the employEE may very well fund much more of his or her Defined Benefit pension than led to believe.
EXAMPLE 1: Assumptions: 62 year old member of Public Employees Retirement System (PERS); 35 years of service; starting salary of $8,000 with 6 percent annual increases; final average salary (FAS) of $54,720. The member is entitled to a Maximum pension benefit of $34,822 calculated as follows: 35/55 X $54,720. The Division of Pensions and Benefits establishes a Pension Reserve of $320,361 (9.2 X $34,822) to guarantee this member, beginning at age 62, $34,822 annually for life.
The employEE’s Annuity Savings account balance goes towards the funding of the actuarially required $320,361 Pension Reserve with the State making up the difference. The employEE, however, doesn’t know the balance of his/her Annuity Savings account because the account is never credited with the investment return generated by the multi-billion dollar investment portfolio that his or her Annuity Savings account is co-mingled with. If we assume an average annual rate of return of 9 percent over the past 35 years, at age 62, the Annuity Savings account balance is $177,841 which represents 55.5 percent of the required Pension Reserve of $320,361. The State guarantees the balance of $142,250.
Recognizing this deception public employEEs should, at the very least, have the option of rolling over their Pension Reserves to an Individual Retirement Account (IRA). It is a moral outrage to compel an employEE to accept lifetime annuitization ($34,822 annually for life) of a Pension Reserve predominantly funded by the employEE.
OF NOTE: In the event an in-service member severs employment before attaining 3 years of credited service a refund of his or her Annuity Savings contributions is made with no interest. Should an in-service member sever employment after attaining 3 years of credited service he or she is entitled to a return of his or her Annuity Savings contributions with 2 percent interest. Should an in-service member die after having attained at least 3 years of credited service the employee’s beneficiary(ies) is entitled to a return of the employee’s Annuity Savings contributions with 4 percent interest.
EXAMPLE 2: Assumptions are the same as Example 1 except the 62 year-old employee is a
member of the Alternate Benefit Program (APB). The APB is the primary (401(k) type) Defined Contribution plan for the staff at the State institutions of higher education. The APB requires the employER to contribute 8 percent of salary with the employEE contributing 5 percent. The employEE’s individually owned Annuity Savings account balance, at age 62, is $462,469 which is 44 percent more than the Pension Reserve requirement in example 1 ($462,469 divided by $320,361).