Pension perk granted by California legislature, now under fire

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A little-know pension benefit used by tens of thousands of state workers annually, has bubbled up to the top of a list of pension abuses under fire for contributing to a skyrocketing unfunded pension liability.

The benefit, called “air time” allows workers to purchase up to five additional years of fictitious work time, in order to retire early, or receive a larger retirement benefits as if they had worked for a longer period.

The employees pay a fee to purchase the additional years of service, although critics say the amount isn’t enough, especially when a pension fund’s investment earnings are lower than projected – an increasingly common occurrence.

Last September, officials discovered that state actuaries priced the benefit so low, they increased buy-in payments by 17 percent to 38 percent, depending on the job classification.

The Los Angeles Times reports that benefit was bestowed on all state employees in 2003 by the legislature, which was intending to help its own staffers who took time off to run their bosses election campaigns. After then-Gov. Gray Davis vetoed the bill in 2002, lawmakers pushed through legislation the following year, this time making all state workers eligible for the perk.

The unusual benefit does not exist in private businesses with their employees’ retirement plans. Instead, those wishing to do something similar must purchase an annuity, which pays a return of 3 percent, less than half as much as the 7 to 8 percent guaranteed air time benefit provides.

Pension benefits are determined by multiplying a small percentage – usually 1.2 to 3 percent – times the number of years that an employee has worked and applying that percentage against the final year’s income. If an employee’s deal provided for a 2 percent factor, and worked 30 years in government, then a $100,000 final salary would yield a $60,000 annual pension benefit for life.

In an example given by the Times, a 55-year old employee who purchased 5 years of air time for $124,000 would get another $9,840 for life, and break even on the investment at age 67. According to actuarial tables, that employee could expect to live to 83 years if a male, and 86 if a female.

One investment advisor, Scott Hanson of Sacramento-based Hanson McClain, said he almost always advises government workers to purchase the extra years. Even after the recent price increase, “It’s still a tremendous benefit,” he said.

Los Angeles Times

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