For Many Educators, Cashing Out Makes Sense Staying On The Job Carries Financial Penalty Under Retirement Plan’S 30-Year Glitch
Should I stay or should I go?
For an increasing number of 50-something educators in Washington asking this question, the answer is in the math.
Many educators who fall under the state’s Teachers’ Retirement System Plan 1 are finding it more lucrative after 30 years of work to retire and “cash out” their contributions, take the state’s monthly pension payment and start a new job elsewhere.
Those who stay after 30 years may be penalized with reductions in their pension payment.
Under TRS Plan 1, educators reach their maximum service credit after 30 years.
At retirement, they have two options:
They can cash out part or all of their own contributions plus interest. Then they receive a monthly pension payment based on the remaining balance in their account, which includes the state’s contributions.
Or educators may choose to leave all their contributions in the state’s retirement system, allowing them to receive a monthly pension equivalent to 60 percent of their final salary. That percentage doesn’t increase if they work longer than 30 years, though their pension payments could increase if they get raises.
Most educators choose the cash-out option. That allows them to roll over the money into an investment that earns more interest. Left in the state system, they would receive only their fixed monthly pension payment and lose the benefit of earning more money on their investment.
There’s also an incentive for educators to cash out sooner rather than later. Teachers who stay on longer than 30 years see a decline in monthly benefits with each extra year they work - unless they get a raise.
This quirk in the system became apparent about 15 years ago to the Washington Education Association and the Association of Washington School Principals, lobbyists for the groups say. But efforts to correct the problem have been largely unsuccessful.
The confusing nature of the math formulas behind TRS Plan 1 hasn’t helped.
“It’s difficult for legislators to pick up and understand something complex like this,” said John Kvamme, a lobbyist and consultant to AWSP and the Washington Association of School Administrators.
More than 20,000 teachers and administrators fall under TRS Plan 1. They started work before 1977. About 15,000 of them - 25 percent of the state’s K-12 educators - will be eligible to retire by 2008.
Plan 1 was put in place in the 1930s, with its 30-year cap added in the 1970s, said state Actuary Jerry Allard.
He said he can only speculate why the cap was added.
“It’s clear it’s a cost savings (to the state),” he said.
Despite the problems with TRS Plan 1, it is the envy of teachers and administrators who joined the system after 1977 and landed in the revamped retirement systems: Plan 2 and Plan 3.
The more than 9,000 educators under Plan 2 don’t even have the option of receiving a full benefit until they are 65, regardless of how many years they’ve worked. Cashing out their contributions isn’t an option, either.
“I have Plan 2 teachers who would have given a limb and their firstborn to be in Plan 1,” said Bob Maier, lobbyist for the WEA.
Plan 3 is more flexible and allows educators to invest their contributions in a variety of markets, and doesn’t penalize them as much if they retire before 65.
After Plan 3 was put in place in 1996, the majority of those in Plan 2 transferred over. The bulk of the state’s educators - nearly 33,000 - are in Plan 3.
“Seventy-three percent changed to Plan 3 because they couldn’t bear to stay at their jobs for so long,” Maier said.
Legislative efforts to fix the financial disincentive in Plan 1 have largely been ineffective, educators say.
Last year, lawmakers passed a bill intended to give educators greater financial incentive to stay on after 30 years. However, it only benefited those who didn’t anticipate any salary increases, and the Legislature approved salary increases for teachers for this biennium.
“It really didn’t solve the problem,” Kvamme said.