Vermont state employees and public school teachers are entitled to enroll in both pension and retirement health insurance plans.
The details of these plans will be reviewed below, including the benefits, the costs to employees and the costs to the state. The benefits under these pans will also be compared to prevailing private sector norms. This review will start with pensions.
There are basically two basic types of pension plans.
In a defined benefit plan, both the employer and employee make annual contributions to a pension fund during their employment period and retirees receive a fixed annual benefit in retirement, typically tied to salary level and years of service. The employer is at risk if investment returns on the pension fund are insufficient to meet future benefit obligations.
In a defined contribution plan, both employer and employee make annual contributions to a tax-deferred retirement savings plan and retirees can take benefits from this plan as they see fit. The employer is not at risk for the investment returns or the ultimate level of benefits.
The state manages three defined benefit pension plans, two defined contribution plans and one legacy Single Deposit Investment Account, as follows:
The Vermont State Retirement System (VSRS): this is the defined benefit pension plan for state employees. The state government makes all employer contributions to this plan.
- State Teachers Retirement System (STRS): this is the defined benefit pension plan for teachers. The state government (not the schools) makes all employer contributions to this plan.
- Vermont Municipal Employee Retirement System (MERS): this is the defined benefit pension plan for municipal employees throughout the state. Local municipal governments make the employer contributions.
- Vermont State Defined Contribution Plan: this is a state sponsored retirement savings scheme similar to an IRA or 401-K plan. The state government makes all employer contributions to this plan.
- Vermont Municipal Employee Defined Contribution Plan: this is a retirement savings scheme for municipal employees. Local participating municipalities make employer contributions.
The vast majority of state employees and teachers are enrolled in the state’s defined benefit plans, which guarantee a fixed annual compensation upon retirement.
All three defined benefit pension schemes are reviewed below. As you might imagine, these plans are somewhat complex and have been subject to change over the years. As a result, each pension now has several different retirement plans with slightly different features. For purposes of the comparison below, The Informed Vermonter has selected the plan with the largest employee participation as of 2016.
Vermont’s Defined Benefit Pension Plans
|VTSR (State Employees)||STRS (Teachers)||MERS (Municipal Employees)|
|Active Members (current employees)||8,436||9,919||6,966|
|Retirees Receiving Benefits||6,542||8,763||2,734|
|Largest Plan||Plan F||Plan C||Plan B|
|Employee Contribution||6.4% Gross Pay||5%-6% Gross Pay based on Years of Service||4.875% Gross Pay|
|Employer Contribution||10.27% Gross Pay||Vermont pays an amount based on an annual actuarial computation||5.5% Gross Pay|
|Average Final Compensation (AFC)||Highest three years||Highest three years||Highest three years|
|Benefit Formula||1.25% AFC prior to 1990, 1.67% AFC thereafter for every year of service||1.25% AFC prior to 1990, 1.67% AFC thereafter for every year of service||1.7% AFC for every year of service (1.4% for years before Plan put in place)|
|Maximum Benefit||50% AFC||53.34% AFC||60% AFC|
|Normal Retirement||62 with 30 years||62 with 30 years||62 with 5 years, 55 with 30 years|
|Early Retirement||55 with 5 years||55 with 5 years||55 with 5 years|
|Early Retirement Reduction||6% per year before age 62||6% per year before age 62||6% per year before age 65|
|Cost of Living allowance||100% CPI (50% if retired before July 1, 2008)||50% CPI||50% CPI|
Source: 2016 Comprehensive Annual Financial Report
All three of these plans are pension funds, which are managed on a fiduciary basis on behalf of employees and retirees.
For investment purposes, the assets of the three plans are pooled. All money flowing in (employer contributions, employee contributions, investment returns) and all money flowing out (benefit payments, investment losses, investment management fees and administrative costs) flow through these pension funds.
A summary of the annual costs of these defined benefit pensions for fiscal year 2016 is provided below.
Cost of Defined Benefit Pensions: Fiscal-Year 2016 ($ millions)
|VSTR (State Employees)||STRS (Teachers)||MERS (Municipal Employees)|
|Benefit and Refund Payments||119.2||162.2||24.6|
Source: 2016 Comprehensive Annual Financial Report
The government of the State of Vermont is, of course, the employer for the state employee and teacher pension plans. As indicated above, the state contributed $127.5 million to these two plans in fiscal year 2016.
Any annual deficits or surpluses after taking account of employer and employee contributions would have been funded by or contributed to the underlying pension funds.
Note that the teachers’ pension has 17% more current employees than the state fund. However, the employee contribution to the teachers’ pension is only 1.3% higher than the state employee contributions and the resulting payment made by the state government is 35% higher.
This may help explain the recent controversy in Vermont as between Governor Phil Scott and the State Teachers Retirement System.
The three defined benefit pensions outlined above have aggregate assets of $3.77 billion. Unfortunately, the estimated future liability for benefit payments over the next 30 years is $5.88 billion, resulting in an unfunded pension liability of $2.1 billion.
The Informed Vermonter will discuss this liability in greater detail under Debt and Other Liabilities.
As mentioned above, Vermont also has a defined contribution plan under which the state contributes 7% and the employee 2.85%. Only 602 employees participate in this plan. This plan has $57.1 million in assets and no liabilities.
As part of a major set of changes introduced in 1981, there was a one-time election for state employees to roll into a Single Deposit Investment Account. Only 1,465 employees/retirees participate in this and the state has no liabilities beyond the $53 million of assets in this fund.
A defined contribution plan is also available to municipal employees. The state government has no obligations with respect to the municipal plan, but manages the investments on a pooled basis on their behalf.
How Do Retired State Employees Fare?
Lets assume Jack(or Jill) retired on January 1, 2017 after 30 years of work for the state at age 65. His average salary over this period was $45,000 and his top three -year’s salary was $57,000.
Throughout his career, Jack would have been paying 6.4% of his salary to the state pension plan and 6.2% of his salary to Social Security, or 12.6% of his gross pay. With an average salary of $45,000, Jack would have contributed about $170,000 to his retirement plans.
Under the Vermont pension, Jack would receive an annual benefit of $28,500. According to the AARP Social Security Calculator, his annual Social Security benefit would be another $19,740, bringing his total retirement income to $48,240, or about 85% of his peak earnings.
His disposable income, however, may stay roughly the same. With Medicare, his annual insurance premium cost will be lower. A portion of both his state pension and Social Security are tax-free and there will be no more FICA deductions, so taxes will be lower as well.
To the extent he has no remaining mortgage and no children to care for, Jack should be in good shape to enjoy a well-deserved retirement.