What's Happening?
The California Public Employees’ Retirement System (CalPERS) is set to discontinue the Actuarial Equivalent Reduction (AER) payment option for new service credit purchases starting January 1, 2028. This change means that members who wish to purchase service credit on or after
this date will be required to pay the full amount before retiring. Currently, AER allows members to pay for service credit balances at retirement through a permanent reduction to their monthly pension. While AER does not decrease the total cost of the service credit, it alters the payment method. For purchases made by December 31, 2027, AER may still be an available option for eligible members under existing rules. CalPERS emphasizes that service credit is a crucial component of retirement benefits, influencing the monthly pension check alongside final pay and benefit formula. Generally, a higher amount of service credit can lead to a larger monthly pension. This upcoming change will also impact state Second Tier members regarding their conversion purchases.
Why It's Important?
This policy shift by CalPERS holds significant implications for its members, particularly those planning to purchase additional service credit to enhance their retirement benefits. The elimination of the AER option removes a flexible payment mechanism that allowed members to defer the full cost of service credit until retirement, spreading the financial impact over their pension lifetime. Without AER, members will need to secure the entire payment upfront or utilize other available options such as lump-sum payments, payroll deductions, or rollovers from qualified retirement accounts like 401(k)s or 457(b)s. This could create a financial burden for some members who may not have immediate access to the full funds required. The change underscores the importance of proactive retirement planning and understanding the various payment methods available. State Second Tier members, whose retirement formulas are 1.25% @ 65 (Classic) or 1.25% @ 67 (PEPRA), will also be affected, necessitating a review of their conversion purchase options before the deadline.
What's Next?
CalPERS members considering purchasing service credit, especially those who might rely on the AER option, are advised to act promptly. To utilize the AER option, members should initiate the process approximately four to six months before December 31, 2027, to ensure their election is received by CalPERS before January 1, 2028. This timeframe allows for the necessary employer review and certification that often precedes a cost estimate or election completion. Members can log into their myCalPERS account to review their options, estimate costs, and determine their eligibility for various purchase types. After January 1, 2028, members will be expected to pay in full immediately or opt for an installment plan for any new service credit purchases. CalPERS also recommends that state Second Tier members review their tier conversion options as early as possible, as AER will no longer be a payment option for these conversions post-2027.
Beyond the Headlines
The discontinuation of the AER option by CalPERS reflects a broader trend in public pension systems towards streamlining financial processes and potentially reducing long-term administrative complexities associated with deferred payment schemes. While the immediate impact is on individual members' payment flexibility, this move could also be part of a larger strategy to ensure the fiscal health and sustainability of the pension fund. By requiring upfront payments, CalPERS may aim to mitigate certain financial risks or administrative overheads linked to managing ongoing pension reductions for service credit purchases. This change could also encourage members to engage more actively with their retirement planning earlier in their careers, fostering greater financial literacy and preparedness for retirement. The shift highlights the evolving landscape of public employee benefits and the continuous adjustments required to balance member needs with the long-term solvency of large pension systems.
