2 Upcoming Changes for CT State Employees Pensions in 2022
According to the Office of the State Comptroller, as of November 19, 2020, there were 13,066 state employees (full-time and part-time) who are eligible for normal or early retirement before July 1, 2022. With that in mind, there are two significant changes to the CT State Employees Pensions that will affect those who retire on or after July 1, 2022. If you have a pension through the State of CT then the question you should be thinking is, should I retire before the changes take effect? In this writing, we will cover various factors that will affect your ability to retire before July 1, 2022.
Key Takeaways:
● What elements of the cost of living adjustment are changing?
● How are my health insurance premiums changing?
● Are you eligible to retire?
● Setting your budget for retirement
What Elements of the Cost of Living Adjustment are Changing?
There was an agreement made in 2017 with the State Employees Bargaining Agent Coalition (SEBAC) that included many changes to state employee retirement benefits. The largest change is the elimination of the minimum annual Cost of Living Adjustment (COLA) for pension benefits and delaying a retiree’s first COLA until 30 months after retirement. Both of which will have a negative impact on those who retire after June 30, 2022.
A cost of living adjustment is a change in one’s retirement benefit to account for increasing prices caused by inflation. The adjustment is designed to make the money received have the same purchasing power regardless of the inflation level. Without an adjustment, inflation would lower the utility of the payment and you would not be able to buy as much as before.
The current procedure allows retirees to be eligible for a cost of living adjustment anywhere between the first 9-15 months with an average of 12 months. Meanwhile those who retire after the cutoff will only get one cost of living adjustment at the end of their first 30 months of retirement. Therefore, the old procedure would have provided at least two cost of living adjustments in the same time frame. A benefit of the plan is that retirees are eligible for a cost of living adjustment every twelve months after that.
Beginning after the July 1, 2022 cut off, the State has relinquished their obligation to adjust pension payments at least 2% (current minimum) for inflation. Since 1997, the State has used a formula to calculate the minimum cost of living adjustment. The formula used took 60% of the increase in the Consumer Price Index (CPI-W) up to 6% and then anything above that took 75% of the increase to calculate the COLA.
Originally, the State capped the maximum increase at 7.5% and the minimum was locked at 2% resulting in cost of living adjustments between 2%-7.5%. However, those who retire after the July 1st cutoff could be negatively impacted as they could experience cost of living adjustments below 2%. For example, if the CPI-W does not increase, then they would not receive any cost of living adjustment.
Therefore, the elimination of the minimum cost of living adjustment is something to consider for those who plan to retire after the cutoff. They will also experience decreasing purchasing power throughout their first 30 months of retirement until the first cost of living adjustment. If you are concerned about the effects of these changes then you should begin to look at your financial standing and evaluate if you are in a position to retire before July 1st.
How Are My Health Insurance Premiums Changing?
Now let’s look at the changes to insurance premiums after July 1, 2022. To be eligible for Medicare a retiree must be of age 65 or older. Retirees that qualify for Medicare are currently reimbursed for the full standard Medicare Part B premium by the State. This portion of the plan is not going to change, although there is an additional premium for Medicare Parts B and D that we should discuss.
The Medicare Income Related Monthly Adjustment Amount (IRMAA) is an additional premium that must be paid if you make over a certain amount in retirement. The majority of retirees are not impacted by IRMAA, but if you do have a large pension or a large amount of investments between you and your spouse then it may apply to you. After July 1, 2022, there is going to be a change to IRMAA that may negatively affect certain individuals.
Currently, if you are subject to IRMAA then the State pays the full amount so you will not have any out of pocket costs. However, if you retire after July 1, 2022, then the State is going to split that additional premium with you 50/50. Therefore, some retirees will experience out of pocket costs that they wouldn’t have before. You can listen to my podcast “Avoid Overpaying for Medicare in 2021 and Beyond” to get a more detailed explanation of IRMAA and strategies to potentially avoid it.
If you are retired but not yet 65 years old, then you are not (currently) eligible for Medicare. For those retirees, there are insurance premiums that must be paid out of pocket. Currently, those premiums are 1.5% for hazardous duty retirees and 3% for non-hazardous duty retirees. After July 1, 2022, these amounts will be increasing to 3% for hazardous duty retirees and 5% for non-hazardous duty retirees. Therefore, if you are retiring before age 65 and after the July cutoff, then you will be subject to increased premiums. Read our blog post “Health Insurance Coverage Before Age 65” to learn more about the various options available and the costs associated.
There are a few strategies one can take if they are thinking about retirement. If you plan to retire prior to turning 65 then doing it before the July cutoff will allow you to lock into the lower premiums. This would save you 1.5% for hazardous duty retirees and 2% for non-hazardous waste retirees. Although, if you are near age 65 then it would be potentially wise to wait until after you turn 65 to retire. This way you could avoid paying the recently increased premiums for your insurance.
Are You Eligible to Retire?
With all these different retirement plans, depending on which one you fall under, there are a minimum number of years that you must work to be eligible to qualify. Each tier system applies to employees hired in different periods of time and may include different qualifications for retirement. You will see that each tier increases the normal retirement age as we continue to see improved medicine and longer life expectancies.
Tier 1 is a contributory defined benefit retirement plan for those hired on or before July 1, 1984. Within Tier 1 there are Plans A, B, and C which are based on your annual salary. These different plans under Tier 1 determine the amount that you will contribute towards the pension plan. Lastly, you have likely worked enough years to be eligible for normal retirement if you find yourself in Tier 1 as the requirements are age 55 with 25 years of service or 65 with 10 years of service.
Tier 2 is a non-contributory defined benefit retirement plan (for most members), and those employees that were hired between July 2, 1984 and June 30, 1997, while Tier 2a is a contributory defined benefit retirement plan for those hired between July 1, 1997 and June 30, 2011. In a contributory plan the employee pays a portion of his/her regular salary towards the pension while the employer fully covers the plan in a non-contributory. Those who fall under the Tier 2 or 2a plans must be either age 60 with 25 years of service or 62 with 10 years of services to be eligible for normal retirement.
Tier 3 is a contributory plan that includes employees first hired on or after July 1, 2011 except for certain employees in higher education who are eligible to participate in another retirement plan. Those who were previously part of Tier 1 and 2, left their job, and then were rehired after July 1, 2011, would also find themselves within the Tier 3 plan. To qualify for normal retirement, you must be 63 with 25 years of service or age 65 if you have at least 10 years of service. Keep in mind, if you do not qualify for normal retirement in any of these plans, then you will not receive the full amount of the benefit.
The difference between Normal Retirement and Early Retirement is the amount paid out to you. Retirement reduces your benefit by 5/9 of a percent for each month before the normal retirement age up to 36 months. If the number of months before normal retirement age is larger than 36, then your benefit would be reduced by 5/12 of one percent for all additional months. Therefore, if you do not qualify for normal retirement then it may not be the best idea to take an early retirement and receive a reduced pension benefit.
Another thing to keep in mind is your access to health plans. Most plans require at least 25 years of service with the State. If you worked and retired in CT, then you will have access to more options. If you worked in CT and then decided to retire elsewhere, then the number of plans you can choose from will be more limited.
Creating a Budget for Retirement
When you retire, your employment checks stop, leaving you with less sources of income. One source is a pension, another is Social Security, and the last depends on how much you have invested in retirement funds. Therefore, the first thing you should do is sit down and figure out a monthly budget that will allow you to live the lifestyle you want to live in retirement. We would recommend checking out my podcast episodes “Properly Estimating Retirement Cash Flows” and “A Retirement Income Planning Strategy That Works” as they would provide useful guidance on this process (put retirement budget here).
For those who qualify for a pension, we would recommend going on the State of Connecticut website to get an estimate of what your pension will be. From there you would input your highest three years of work history, and the number of years that you have worked for the State including any years you may be eligible to buyback. An example would be the Military Buyback Program that allows qualified veterans with active duty military service time to receive credit for their military service time to be added to their years of civil service. This not only increases their pension benefit, but also gives said service members the potential to retire earlier.
Once that has been inputted, there are a couple different payment options which will depend on if your relationship status. If you are single, you can check out the single life annuity (likely the best) or a period certain option. If you are married, then you can choose between the joint payment options that would either leave your spouse 100% or 50% survivor benefit, or an alternative would be a period certain option.
The estimated payment benefit puts you at an advantage for retirement as you can determine if the amount is where you want it to be. If the amount is not yet high enough, then continuing to work may be a good idea as you will continue to build your CT State pension benefit. From there, you can test a few different scenarios in the calculator using higher salaries and/or more years worked. This way you can figure out a combination that will provide the income you are looking to receive.
Once you determine your projected income, evaluate if you will have enough money coming in to cover your expenses. If you don’t have enough money coming in, it may be beneficial for you to forgo the cost-of-living adjustment and retire after July 1, 2022. If eligible, your pension benefit will continue to grow, and you’ll have more money to put into one of the state benefits plans such as the 403b or 457 plans. Another benefit of continuing to work is that it shortens your retirement horizon putting less pressure on your income in retirement.
For example, a 60 year old who is qualified to retire but calculated that money will be tight may want to continue working. To contrast, it may be a good time to retire for a 62-63 year old who is collecting Social Security with significant savings in other retirement plans. This way they could take advantage of the earlier cost of living adjustment with a minimum cost of living adjustment (2%). Additionally, the 62-63 year old would be able to pay the lower insurance premiums until they reached 65 years of age. Therefore, it really depends on your situation and if you are unsure or need help then it may be a good idea to get in touch with a financial planner. Consider scheduling an appointment here.
Prefer listening instead of reading? We have you covered, check out my Podcast “2 Upcoming Changes for CT State Employees Pensions #50” on my Website, Spotify, or Apple Music!
If you are interested in reading related blogs, then I would suggest checking out:
“How to Calculate the Cost of Living Adjustment for CT State Employees”
“What Connecticut State Employees Should Do With Extra Vacation Days”
