The Breakpoint
The breakpoint is a dollar figure used in the formula to calculate State Employee Retirement System (SERS) pensions. Salary above the breakpoint is multiplied at a higher rate than salary below the breakpoint.
In 1981, the State and Unions agreed to set a new “breakpoint” for Tier 2 (Tier 1 has a breakpoint of $4800 which was established in the 1940s and has never changed). So when Tier 2 was created, the State insisted on a breakpoint that gradually adjusted to account for inflation. At the time, inflation was in the high teens, therefore the unions and state agreed to a 6% annual increase in the breakpoint (knowing inflation would not stay in the teens, but not believing that it would fall to levels of which we are now accustomed). Within just a few years, inflation declined and the inflation rate has never reached 6% since. As of January 2013, the breakpoint is at $65,300 and will increase by 6% in January 2014 to $69,200 and the 6% increase formula will bring the number to $73,400 in January 2015.
The Effect of the Breakpoint
The breakpoint impacts your pension in the following way (for Tier 2, 2A, 3)…your pension is based on the average annual salary for your 3 highest years of income (Tier 3 uses 5 years). Any portion of your income above the breakpoint would be multiplied by 1.83% (up to 35 years max) and every dollar below the breakpoint would be multiplied by 1.33%…add those two numbers together then multiply by the number of service years to calculate your pension. So if your salary is below the breakpoint, your pension formula is a straight calculation of 1.33% times years of service (to a max of 35 years, then a separate formula kicks in). If a portion of your salary is above the breakpoint, a higher multiplier (1.83%) is added in for the dollars above the breakpoint.
The Problem
The problem is that the breakpoint increases at 6% annually and our wages increase by far less, meaning each year a slightly larger percentage of your salary falls below the breakpoint. Naturally, your pension does increase annually (because the number of service years increases and raises/steps increase our salaries), but the percentage of your pension-to-salary decreases because more of your salary is calculated at the lower multiplier. Basically, a person with a salary above the breakpoint who retired 5 years ago from state service in your same job title at the same pay grade and step that you retire at would receive a pension at a higher percentage of their salary than you will receive, and each subsequent year your pension will increase but will be a slightly lower percentage of your salary than the year before.
There is a Fix.
There is a secondary calculation for the breakpoint. For the past 31 years the breakpoint has gone up 6% annually, however, the breakpoint is actually the lower value of 2 calculations: either the 6% increase or the 35-year average of the Social Security Maximum (SSMax). Right now, the 35-year average of the SSMax is $67,309, however, by January 2015, it is projected that the 35-year average SSMax would be $72,900 while the 6% formula would put the breakpoint at $73,400…this means that the 35-year average SSMax would become the breakpoint in January 2015. The 35-year average SSMax increases roughly 4 to 4.25% annually, thus, the breakpoint would convert from a 6% annual increase to a 4% or 4.25% annual increase. The SSMax formula may still outgain our wage increases, but the pace at which the breakpoint increases would be significantly reduced and the negative impact the breakpoint will have on our pension would be greatly reduced.
SEBAC 2011
As part of the SEBAC 2011 agreement, the State committed to setting aside ½ % of payroll to address the impact that the breakpoint has had on Tier 2/2A/3 pensions. There have been ongoing meetings within the coalition of unions regarding how best to apply the committed funds. With the breakpoint approaching a new, lower adjustment rate already, the coalition has been looking to fix the ‘damage’ that has already occurred and to do it within the small pool of money the State has committed. The coalition has taken the approach that any solution we agree upon will ‘do no harm’ to any active employee pension and will seek to improve the pension calculation for even our newest union members. It is expected that within the next few months, the State and Unions will be able to agree on a solution which will improve the pension calculation for all Tier2/2A/3 employees.