Faculty Senate

Faculty Forum Papers

October 1977 - Some Little-Known Facts About a Well-Known Retirement Plan By

Peter Anton

September 28, 1977

     PERS will succor us; we shall not, in our declining years, want.

     If that is true, its truth is due largely to recent improvements in the pension part of our retirement benefit - the part that is paid by the State. The part we buy for ourselves is by monthly deductions from our paychecks, i.e., the annuity, has not fared well and is in need of improvements. I'll suggest some shortly.

     Consider first the recent record of what has been done with our annuity money. I choose the interval 1970 - 1976 because it is the period during which we have had the option of making our contributions either to the fixed or to the variable plan.

Per Cent Return on Investment

				Fixed Plan	Variable Plan
			1970	5.09	7.47
			1971	6.27	9.47
			1972	7.46	13.87
			1973	0(!)	-16.39
			1974	5.50	-18.16
			1975	7.50	18.94
			1976	7.75	18.58

     Very interesting - but how are we doing? These figures do not tell us. When the variable plan was first made available to us, we decided to, or not to, go into it. Was our decision a happy one, or should we now be eating our hearts out? How are we to compare the outcomes?

     What we need is a pair of percentages that will let us compare the two plans, not just year by year, but for the entire seven - year interval. This pair of percentages will give us the answer to the following question: What constant rates of annual interest, compounded annually, would, had they been in effect for the respective plans from January 1, 1970, through December 31, 1976, have given us the gains that were actually experienced by the plans during that period? These rates are the measure of the seven-year "performance" of each plan. They are not difficult to calculate (though PERS must think the effort formidable, for they do not make it); a little labor produces these results:

Average Annual Rate of Return, 1970-76

							Fixed Plan	Variable Plan
							5.79%	4.39%

     That is the true comparison of outcomes over the entire period. Not what you would call sparkling performance in either case, but clearly the fixed plan has done better - so far.

     As a matter of speculation, assume (to take some reasonable figure) that the fixed plan continues in 1977 to gain at the 7.75% rate of last year: what rate of gain would the variable plan have to show in 1977 for the average annual rates of gain since 1970 to be equal? I.e., how well would the variable plan have to do this year in order for someone who had been in it from the beginning to be as well off as if he had been entirely in the fixed plan since the beginning? Answer: 18.3%. Don't hold you breath.

     Turning from what can't be remedied to what has been, there was, until this month, a restriction on our PERS annuity that was highly disadvantageous: we were not, upon retirement, permitted to make a lump-sum withdrawal of the balance in our account. This was a piece of paternalism intended to prevent the lumpenprofessoriat from squandering the funds it is forced to accumulate for use in the years of retirement. But now that we can get our hands on it we can get our hands on it we can do very much better with it than PERS does for us. Consider this. With an accumulation of $50,000 in the annuity account upon retirement, PERS will pay out, from the annuity account only (ignoring the payout due to the pension), for a man aged 65 who has a wife aged 63, $323.43 per month. If his wife outlives him, she continues to get the same amount as long as she lives. When both have gone to a better world, the account goes to hell: it is wiped out. However, if that couple had taken that $50,000 in hand at the time of retirement, they could have invested it in AA-rated corporate bonds which, with an easily obtainable yield of 8.05%*, would have given them-you've guessed it--$324.43 per month. And when they were both dead their estate would have $50,000 worth of bonds in it.

     There's a catch here, to be sure: if the $50,000 were withdrawn in a lump upon retirement, there would be income tax to pay on that part of it due to interest or capital gains. This might be of the order of $30,000, and the tax on it perhaps $8,000, so there would be only $42,000 to invest. That would yield less money per month to live on, but it would also keep the principal from dying with the principals.

     There's a better way. If we were permitted to put our monthly annuity contributions not into PERS but into a tax-deferred annuity scheme, such as one of those we may at present contribute to voluntarily, we would have either a much larger accumulation upon retirement than we can get with PERS because we would be contributing before-tax money instead of after-tax money, or alternatively we would have the same accumulation as if we had stayed with PERS, but larger net paychecks during our working years owing to tax deferment on the contributed funds. Finally, we would have much greater flexibility as to use of funds upon retirement. Of course, we would also have full tax liability as our tax-deferred annuity was paid out to us, but we'd be in a lower tax bracket than we were in during our earning years: we'd pay less tax than we presently do.

     The pension part of the retirement benefit is also in need of attention. Pension benefit is calculated by a formula of which one factor is your final average monthly salary, i.e., your average monthly salary during your highest-paid three years of the ten years preceding compulsory retirement. These, of course, will normally be your last three years. But the years taken into account by the formula are calendar years, not academic years. So if you retire, as is the custom in academia, in June of year n, that year-your academic year of highest pay-is not counted for purposes of calculating your pension benefit: you were on the pay roll only through June, so your earnings for calendar year n are relatively low. Thus, half your year of highest earnings does not count toward your pension benefit.

     Our fathers, who are in Salem, ought to have all these matters drawn to their attention. An effective union might concentrate their attention wonderfully.

     A final note for those who teach part time or do other work on someone's payroll after retirement. You will continue to make contributions to Social Security (6.05% next year) on your earnings, even though you have begun to draw Social Security pay-in one pocket, out the other. What is not widely known is that such further payments to Social Security may be used, at the end of each year in which you have made them, to recalculate your social Security benefit. A professor who retires but then teaches one-third time might earn $8,000 for his work and thus get SS credit for a year of $8,000 earnings. When his original benefit level was calculated by SS, he had to take into account early working years, when the maximum SS credit allowable was much less than that (e.g. $4,200, $4,800, $6,600). A year of low credit can be replaced by a year of higher credit for purposes of recalculating a new and higher benefit level. There is no limit to the number of these annual recalculations.

     I still receive requests from faculty members for copies of my Faculty Forum Paper of last April concerning the delights of the tax-deferred annuity program, but I'm unable to oblige; I simply haven't any left. Shouldn't there be a copy in your department's files?