Unless you’re in the CalPERS retirement system, there is a good chance that you may not understand how it works. Before going into the great debate over local plans, I thought it best to do a series of columns explaining how it works and who pays what.
This first column is about basic plans and calculating the size of the retirement checks. Disclaimer, this is not legal or financial advice and may contain errors. I will not address disability retirement of other unusual situations – the basics are tough enough.
Picking a Plan: CalPERS offers a bunch of retirement plans and the public agency, called the employer, negotiates with the workers, the employee groups to select them. The two together agree on which plan they will use for which workers.
Defined Benefit: Formulas for lifetime retirement payouts are defined in advance. CalPERS has to pay the defined benefits no matter how well or how poorly the fund’s investments perform. The fund invests for returns and the finances are backstopped by the state of California. Employees must have to have a minimum of 5-years in the system to retire under CalPERS.
Employees may or may not be participating in Social Security at the same time depending on the employer. The City of Hollister employees do not participate in Social Security system while the San Benito County employees do. When an agency also participates in Social Security, it affects the employee’s CalPERS plan; I will address that in a future article.
Simple Version: Each plan has two numbers a percentage and an age, like 2 percent at 55. When the employee in this plan is 55 years old, they can retire with 2 percent times the number of years in CalPERS, let’s say 25, times their pay, let’s say $50,000 a year. That’s 0.02 x 25 x 50,000 = $25,000 a year or $2,083 a month in retirement pay. As you probably guessed, few retirements are that simple.
First, there are many plans to choose from in negotiations. The employees want the plans with the biggest payout percentage and lowest retirement age because they get more money. The employers usually want the opposite because the premiums are cheaper.
There are 10 plans they can choose from, the first number is the percentage, and the second number is the full retirement age. Miscellaneous employees: 2.0/55, 2.0/60, 2.5/55, 2.7/55 or 3.0/60. Public Safety employees: 2.0/50, 2.0/55, 2.5/55, 3.0/50, or 3.0/55.
Basic Variable 1: The plan percentage applies only if you’re at the plan retirement age. One can retire as early as age 50 on any CalPERS plan. If you retire early, the percentage will be reduced. For example, if you’re in a 2 percent at 55 plan and retire at age 50 and 1/2, the percentage is reduced from 2.0 percent to 1.474 percent. There are charts for this. A similar rule applies if you keep working – you get a higher percentage up to a limit.
Basic Variable 2: The pay used in the formulas is called Final Compensation. It’s the average full-time monthly pay rate and special compensation for the last consecutive 36 months of employment. CalPERS uses the full-time pay rate, not earnings and will use the highest 36-month period in the employee’s record. They will use the highest 12-months instead of 36-months for an extra premium.
Marty Richman is a Hollister resident. His column appears Tuesdays.
