ÌìÃÀÊÓƵ

EDITORS NOTE: This article was updated on June 3, 2011 to correct several errors and make it more precise about how employees in different plans would be affected.

When new retirement rules kick in next summer, state and county employees will have to work four extra years to earn a similar pension they would get under current rules.

Those hired after June 30, 2012 will have to work longer to earn retirement benefits, chip in more toward their plans and receive smaller pensions compared to existing employees under the changes proposed to the Hawaii Employees’ Retirement System in .

The bill, which awaits Gov. Neil Abercrombie‘s approval, is expected to save the state $440 million over the first five years. The changes initially would have been effective for those hired after this June, but the retirement system’s administrator told lawmakers it needed time to prepare new materials and update its computer system.

Longer Service and Lesser Pension

UPDATE New hires will have to work longer and will get lesser benefits.¹

New hires will mostly be in the system’s largest plan, known as the Hybrid Plan, and generally be eligible to retire at 65 rather than 62 with full retirement benefits. New hires eligible to be in the Contributory Plan — including police, fire, and certain investigators — will have to work until 60, rather than 55, to be eligible to retire. A third plan, known as the Noncontributory Plan, will not be open to new hires.

The formula for calculating maximum retirement benefits for both plans will change in a way that lowers benefits. The formula will decrease from multiplying years of service by 2 percent, to multiplying by 1.75 percent.

Some employees who began work before July 1, 1984 or after June 30, 2006 can retire after working 25 years and receive a pension of 50 percent of an average of their highest three years’ of earnings. Under the new rules, employees would have to work 29 years to get 50 percent of an average of their highest five years’ of earnings. (Pensions for employees in the noncontributory plan — those hired after June 30, 1984, but before July 1, 2006 — are based on years of service multiplied by 1.25 percent of an employee’s average final compensation. However many of those employees have joined the Hybrid Plan, and so will have their benefits calculated using two multipliers, 1.25 percent and 2 percent.)

One of the most common positions in Hawaii state government is an office assistant, a position that pays between $25,668 and $39,480. Using an average of that salary range, $32,574, a retiree could potentially earn a pension of $16,287 after working 25 years, under the current rules. It would drop to $14,235 with 25 years of service under the new rules.

Some lawmakers and labor union representatives have said the changes will have a negative impact on recruiting efforts.

Here’s a breakdown of the changes for new hires and current employees hired after June 30, 2006.

Hired After June 30, 2012

Retirement Age

Many members of the Contributory Plan will be eligible to retire at age 60 after working at least 10 years, or at age 55 after working at least 25 years. Members of the Hybrid Plan will be eligible to retire at 65 after 10 years of service, or 60 after working at least 30 years.

Employee Contributions

Contributions are calculated as a percentage of payroll. Most employees will contribute 8 percent, ERS says. Those will be members of the Hybrid Plan. Members of the Contributory Plan will contribute 9.8 percent, but police, firefighters, corrections officers and others in that group will contribute 14.2 percent.

Employer Contributions

Current employer rates are 19.7 percent for police officers, firefighters, corrections officers and others in that group, and 15 percent for all other employees.

The rates are set to increase over the next five years:

• fiscal 2013: 22 percent for police, firefighters and corrections officers, 15.5 percent for all other employees
• fiscal 2014: 23 percent for police, firefighters and corrections officers, 16 percent for all other employees
• fiscal 2015: 24 percent for police, firefighters and corrections officers, 16.5 percent for all other employees
• fiscal 2016: 25 percent for police, firefighters and corrections officers, 17 percent for all other employees

Average Final Compensation

Calculating retirement benefits includes figuring out an employee’s so-called average final compensation upon which he or she has made contributions if he or she is in the Contributory and Hybrid plans. Noncontributory Plan members do not make contributions.

The figure is calculated by averaging the employee’s five highest paid years of credited service, excluding vacation pay. (State and county employees earn 21 vacation days a year.)

Retirement Allowance

An employee’s maximum retirement allowance would be 1.75 percent multiplied by his or her “average final compensation” multiplied by the total number of years of credited service.

Employees in all other groups get dinged if they retire early. But no reduction in benefits is made if the employee is 55 and has at least 25 years of credited service as a firefighter, police officer, corrections officer and others in that group.

Hired Before July 1, 2012 (but after June 30, 2006)

Retirement Age

Eligible to retire at 62 after working at least five years, or at 55 after 30 years of service.

Employee Contributions

Most employees, those in the Hybrid Plan, will contribute 6 percent. Some, those in the Contributory Plan, will contribute 7.8 percent, while police, firefighters, corrections officers and others in that group will contribute 12.2 percent.

Employer Contributions

Current employer rates are 19.7 percent for police officers, firefighters and corrections officers, and 15 percent for all other employees.

The rates are set to increase over the next five years. See above.

Average Final Compensation

The figure is calculated by averaging the employee’s three highest paid years of credited service, excluding vacation pay. (State and county employees earn 21 vacation days a year.)

Retirement Allowance

An employee’s maximum retirement allowance would be 2 percent multiplied by his or her “average final compensation” multiplied by the total number of years of credited service.

If the employee retires early before hitting 55, his or her retirement allowance would be reduced for age. But no reduction in benefits is made if the employee is 55 and has at least 25 years of credited service as a firefighter, police officer, corrections officer, and others in that group.