State Employees Elect to Pay for Early Retirement or Enhanced Benefits
A USA Today piece describes how public employees in 21 states are buying credit toward early retirement or enhanced benefits.
Employees Purchase “Air Time” to Retire Early
It’s called air time purchasing. Here is an example of how it works (though specific practices vary by state). A state employee makes extra payments to the pension fund (generally via deductions from their paychecks, but in some cases a lump sum). The payments net up to five years of time worked, a.k.a. “air time” credit, allowing:
(i) early retirement with full benefits for those who have not reached retirement age, or
(ii) enhanced benefits for those already eligible for retirement.
According to USA Today, air time is often used as a perk for public employees or a carrot to induce early retirement. “Years worked” credits are also given for time spent in the military and for government work in other states.
What’s the Cost?
A fundamental issue with respect to air time is determining what workers should pay for it.
A handful of states have attempted to make air time charges “cost neutral,” by charging up-front payments high enough to offset the extra benefits early retirees will receive over their lifetimes.
In some cases, however, air time has effectively raised pension costs. Unforeseen costs prompted legislatures in Kentucky, New Hampshire, and Texas to restrict or eliminate air time purchases, and Governor Jerry Brown recently proposed banning them in California.
An important factor behind air time costs is the salary factored into the employee’s air time payment calculation. According to USA Today, at least four states permit employees to buy air time in advance of their retirement-eligibility age, with payments based on current salaries.
Often, those current salaries are not as high as the salaries upon which the individuals’ pension benefits are calculated (“retirement salaries”). Thus, using current as opposed to retirement salaries to calculate air time charges may result in additional pension costs – costs above and beyond what would otherwise be paid over the course of a normal retirement.
For more on air time and other public pension issues, see the following: