Pensions remain one of three reform issues holding up completion of the supplemental budget. In an earlier post, Emily described the pension reform bill passed by the Senate during the regular session. The most recent public proposal from the Senate Republican-Democrat coalition is narrower, focusing solely on early retirement (see the Baumgartner amendment here).

Normal retirement age for state-run pension plans is 65. The benefit amounts employees receive as pensions depend on the numbers of years they have served and their compensation histories. Employees of ages 55 to 64 with at least 10 or 20 years of service (depending on the specific plan) may opt for early retirement. If retiring employees have fewer than 30 years of service, their retirement benefit is actuarially reduced to reflect the difference in the number of years between age at retirement and the attainment of age 65. For such employees retiring at age 55, the reduction is about 64 percent.

In 2000, the legislature sweetened the early retirement option for employees with 30 or more years of service. Under this alternate, the retirement is reduced by 3 percent per year of early retirement (e.g. the benefit of an employee who retires at age 55 is reduced by 30 percent). In 2007, the legislature further sweetened the early retirement option for these employees. For employees age 62 or older, there is no benefit reduction compared to age 65; for an age 61 employee, the reduction is 2 percent; for employees younger than 61, the reduction is 3 percent per additional year of early retirement. For an employee with 30 years of service at age 55, the overall reduction is 20 percent.

The Senate Republican-Democrat coalition proposes to end the sweetened retirement options with 30 years of service for employees first hired after July 1, 2012. Current employees would not be affected.

Eliminating the subsidy for early retirement is sensible in light of increasing life expectancies.

As the two charts below (based on a Social Security Administration actuarial study) show, life expectancies at ages 55 and 65 have increased and are projected to increase further.

A consequence of the increasing life expectancies and the improving health statuses of the “young old”, labor force participation rates for those of ages 65 to 69 have increased from 20 percent to 32 percent over the last 30 years, and will surely increase further in the future.

Similarly, because of increasing life expectancies improving health statuses, the normal retirement age for Social Security is being gradually increased from 65 to 67.