As part of the 2011 SEBAC agreement, the State agreed to put aside 0.5% of its payroll to improve the SERS Tier II, IIA, and III (State Employees Retirement System) breakpoint.
A SEBAC committee representing state employee unions (the 4C’s is represented by NCC’s Tom Jackson) has been meeting over the past year to determine the most equitable way to distribute the set-aside funds. The SEBAC proposal has been approved by the unions and will be approved by the legislature in the 2014 Legislative Session.
The SEBAC proposal will increase the multiplier for final average earnings up to the breakpoint. Currently the multiplier is 1.333% and it will increase to 1.4%. The multiplier for salary above the breakpoint will remain at 1.833% and the way for determining the breakpoint will not change.
“It’s a small increase in the multiplier, but every member in SERS will benefit,” commented 4C’s President Steve Cohen.
So what is the breakpoint and why does it exist?
The SERS formula for calculating pensions includes a breakpoint. Average salary up to the breakpoint is multiplied by 1.333% (soon to be 1.4%) and average salary above the breakpoint is multiplied by 1.833%. A lower breakpoint is good for workers, since the higher multiplier is applied to more of their income.
The breakpoint dates back to when the State created SERS in 1947. It was instituted to compensate higher-earning employees because social security sets a maximum income; for any salary earned above this maximum, the worker does not receive social security. The original theory behind the breakpoint was to create a higher pension multiplier for money above social security maximum to compensate for the lack of social security payments on these earnings.
Originally, back in 1947, the breakpoint was set at a fixed $4,800 for SERS Tier 1. So for those in Tier 1, almost all of their income is above the breakpoint and qualifies for the 1.833% multiplier.
For everybody else, the breakpoint currently increases by 6% a year; a good deal when the economy is booming, but not so good when the economy slows down. In 2014, the breakpoint for Tiers II/IIA/III is $69,200.
The SEBAC Committee considered several options for changing the way the breakpoint is determined, but ultimately opted for a plan that will benefit all SERS participants.