Goal: An effective public retirement system provides employees with benefits that can lead to retirement security, even if the employees don’t spend their entire careers within that system.

Reality: Most public employees in Colorado are teachers. And according to the state’s assumptions, only a small minority will stay for an entire career, with half leaving within three years.[1]

Colorado’s benefits structure penalizes the majority of PERA members, like teachers, who spend limited time with PERA-affiliated employers.

When public employees who leave the system after less than five years choose to withdraw their funds, their PERA retirement account is not credited with any employer contributions. Instead, these employees receive only a 3 percent interest credit on their contributions each year, and leave a significant amount of retirement savings on the table. For example, a Colorado teacher earning $40,000 a year would face a savings penalty of $1,232 if he or she left after one year and $6,606 if he or she left after four years.[2] This money stays with the pension fund and can be used to supplement the pensions of the remaining teachers.

The workers who leave their funds in the system are eligible at age 65 to receive a pension benefit equal to their own contributions, an employer match of those contributions, plus 3 percent interest on their investment, and an annuity using the plan’s assumed rate of return. But because the state itself assumes it will earn a higher interest rate of 7.5 percent on its investments, the plan expects to earn a return 4.5 percent in excess of the interest rate employees receive. Given the low interest rate for employees, even with the employer match and the annuity, the pension benefit they stand to receive will be small

High Turnover Means Few Benefit

Almost two-thirds of educators leave before five years, meaning they will not receive even a minimum benefit if they choose to withdraw their funds.

0-5 Years of Service

64%

5-10 Years of Service

12%

10-20 Years of Service

10%

20-30 Years of Service

7%

30-40 Years of Service

6%

Over 40 Years of Service

1%

Source: See 2013 Comprehensive Annual Financial Report, Actuarial Section, Exhibit A and F (132-134), available here. Note that rates used are specific to the School Division, but include all occupations employed by school districts, including teachers. Rates are similar to those specifically for teachers: Teacher Attrition and Mobility:  Results from the 2008-09 Teacher Follow-up Survey. National Center for Education Statistics, Institute of Education Sciences. 2010-353.

Trailing-Spouse Tina

Tina dedicates her entire career to teaching but, after a decade in Colorado classrooms, her husband gets a job in Chicago. Tina teaches for the rest of her career in Chicago public schools but, because her career spans two states, her combined pension benefit is far less than if she had worked in either state the whole time.

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Years teaching in Colorado classrooms: 10

Tina’s lifetime benefit under the current structure: $18,410

Tina’s lifetime benefit with a smooth accrual plan: $62,797

Tina earns $44,387 less under the current PERA structure

[1] – Source: Author’s calculations based on Colorado PERA Comprehensive Annual Financial Report 2013

[2] – When using the 2013 employer normal cost rate of 3.08 percent, employee contribution rate of 8 percent, and interest rate of 7.5 percent. Values based on Report on the Actuarial Valuation of the Public Employees’ Retirement Association of Colorado, Prepared as of December 31, 2011. Note: the employer normal cost rate published in 2011 was the rate used by employers in 2013.