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Q:
I am a state employee and noticed in my most recent
paycheck that the State share of contribution to
retirement changed significantly. How does this
affect the solvency of the Retirement System?
Additionally, the amount of “unfunded liability”
contribution dropped approximately 3%. While not a
major decrease, it still is a decrease. I am
concerned that there was such angst about the state
of the Retirement System - and more particularly the
unfunded liability earlier this year - that any
decrease in the state’s contribution will adversely
impact the System.
A: The Legislature implemented
changes to the design of the State/Teacher
Retirement Plan in the most recent legislative
session. These changes became effective July 1, 2011
which is why employees are now seeing these changes
in their paychecks.
One
of the biggest changes adopted by the Legislature
was to reduce the cap on the amount of
cost-of-living increases (COLAs) a member may
receive on their benefit once they have retired.
COLAs are based on the Consumer Price Index for
Urban Consumers (CPI-U) as of the end of June of
each year. MainePERS awards a COLA to retirees based
on current law.
Through June 30, 2011, MainePERS was required to
award a COLA based on the CPI up to a cap of 4%.
Effective July 1, 2011, the law requires MainePERS
to award a COLA on the first $20,000 of a member’s
retirement benefit only, up to a cap of 3%. The
$20,000 base will be increased each year for the
amount of COLA awarded, with each year creating a
higher base to which the COLA is applied as long as
the CPI is positive. In addition, retiree benefits
are frozen for three years, which means the COLA
under these provisions starts in 2014. The only COLA
potential for retirees in the interim is an ad hoc
COLA in the second and third year of the freeze that
does not increase the retiree’s base benefit.
The
change in the COLA and the COLA freeze created a
substantial decrease in the expected future costs of
the State/Teacher Retirement Plan, which in turn
decreased the Unfunded Actuarial Liability (UAL).
The reason the State’s UAL contribution is lower is
because the UAL is lower.
The
same effect occurs in the State’s basic pension
contribution. Decreasing the COLA a member will
receive when she or he retires means that person’s
overall retirement benefit will cost less. Therefore
the amount that is required to be set aside is less.
If the employee continues to pay 7.65% toward his or
her retirement, the decrease in applied toward the
State’s contribution which then goes down.
The
changes in the plan do not affect the System’s
solvency. The System is solvent. The COLA and other
changes enacted by the Legislature in the last
session improve the State’s ability to fund the
costs of the Plan within the sources of revenue they
have available because the Plan now costs less.
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Q:
What changes did the
legislature make to cost-of-living adjustments
(COLAs) and how do those changes affect me?
A: The Legislature made several
changes to the way that cost-of-living adjustments
(COLAs) for retired state employees, teachers,
judges and legislators are established.
•
COLAs are frozen for three years.
There will be no COLA in September 2011, 2012
or 2013.
•
Cap on COLAs set at 3%.
COLAs are capped at the level of the Consumer
Price Index for All
Urban Consumers (CPI-U) or 3%, whichever is lower.
Previously, the cap was 4%.
•
COLA applies only to first $20,000 of benefit.
The $20,000 base will go up each year based
on actual COLAs granted.
You can find an example of how the indexing
will work at
www.mainepers.org.
If you are already retired, these changes
affect you in several ways.
•
The three-year freeze on adjustments changes your
potential retirement income during that period,
because you will not receive an increase, even if
there is inflation.
•
Reducing the COLA cap from 4% to 3% has the
potential to reduce your retirement income,
depending upon the actual level of the CPI each
year. If the
CPI is less than 3%, there is no effect on
retirement income.
•
If your annual benefit is greater than $20,000, this
change reduces your future retirement income since
you will no longer receive a COLA on the full amount
of your retirement benefit.
For those with annual benefits less than
$20,000, this change has no impact on retirement
income.
If you are not yet retired, these changes
may affect you in the future, since your
retirement income may not grow at the same rate as
it might have previously.
This is important to take into consideration
when planning for retirement.
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Q: I’ve heard about the “one time” COLA and
would like to know what that is and how it affects
me.
A: An additional change the
legislature made was instituting a “one-time” COLA
in 2012, 2013 and 2014.
There will be a “one-time” COLA if there are
sufficient funds at the close of the State’s fiscal
year. For current retirees and those individuals who
retire over the next few years, the “one-time”
provision is the only way that a retiree will
receive a COLA.
Any COLA paid under this provision is a
one-time payment and will not be counted when future
COLAs are applied.
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Q:
When COLAs resume, will I
still owe towards the recovery of the 2009 negative
Consumer Price Index (CPI)?
A: No, the legislation allowed for
the full recovery of the remaining amount due in
2011 to offset the negative CPI in 2009.
When COLA payments resume in September 2014, there
will be no reduction to account for the
Legislature’s decision to not reduce retiree
benefits in 2009 when the Consumer Price Index was
negative.
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Q: My understanding is that MainePERS does
not handle health insurance coverage; however, I
read that the legislature made changes to the
retiree health insurance program related to retiring
early. Please advise on how this may affect my
decision to retire.
A: Correct, the Legislature made
several changes to the retiree health insurance
program. State employees and teachers who retire
early will not receive any state contribution to
their retiree health insurance premium until they
reach their normal retirement age (i.e. 60, 62 or
65). This does
not apply to state employees covered by Special
plans.
State employees hired on or after July 1, 2011 will
need 10 years of participation in the group health
plan to qualify for any state contribution to
retiree health. In order to receive 100% health
insurance premium subsidy, the employee will need 20
years of participation.
The
cost of the group health plan is capped at last
year’s level. Participants will pay for any
increased costs through changes in benefit design.
If
you decide to retire early, you will have to pay the
full cost of health insurance until your normal
retirement age. Alternately, you could find other
health insurance and switch back to the state group
health plan when you reach your normal retirement
age, as long as you can show you had coverage while
you were off the state plan.
New employees will have to work longer to
qualify for any retirement health insurance subsidy.
All participants in the state group health
plan can expect to pay higher co-pays and
deductibles in the future. For more information,
visit
www.maine.gov/beh.
If you
receive a disability retirement benefit, this change
does not affect you. Additional action is expected
to be considered during the upcoming legislative
session that would further exempt retirees when they
change from disability to service retirement.
Note: This change applies to State Employees who
retire after January 1, 2012 and Teachers who retire
after July 1, 2012.
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Q: I have worked for the State for three
years. How does the change in the normal retirement
age affect me?
A: The Legislature changed the
“normal retirement age” for new hires and for
current members who have less than 5 years of
service on July 1, 2011 from age 62 to age 65. This
is the age when a member with at least one year of
service can begin to receive a retirement benefit.
This does not apply to state employees covered by
special plans.
Members with less than five years of service and new
employees will have to wait longer before they can
receive a benefit.
Eligible members can purchase service, for example,
refunded time, in order to have enough credit to
stay under the Age 62 plan.
Service must have been available for purchase
on June 30, 2011 in order for it to count towards
the Age 62 plan.
Members who were subject to furlough or
shutdown days in 2010 and/or 2011 can purchase those
days in order to remain in the Age 62 plan.
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Q: I understand there were new limits set
for retirees who return to work. Can you tell me
what that is?
A: The Legislature approved new
requirements for State and Teacher members who
retire at their normal retirement age (60, 62, or
65) and go back to work for an employer who is part
of the State/ Teacher retirement plan.
Retirees may not earn more than 75% of the
salary established for the job or work for more than
5 years, and must wait 30 days after leaving their
prior position before going back to work.
Before, there were no limits for State and Teacher
retirees who retired at their normal retirement age.
If
you retire earlier than your normal retirement age,
once you reach your normal retirement age, the new
rules also would apply. See
www.mainepers.org for more information
about the limits on returning to work if you are
below normal retirement age.
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