Early retirement incentive programs are often used in the public sector as a way to reduce staffing in lieu of lay-offs, or as a means to reduce costs by replacing expensive, long-tenured staff with lower-cost new hires.
These programs can make sense, but only if they induce behavior that would not otherwise occur (else the expenditure is being made unnecessarily), and if there is truly a net savings – in other words, if the money spent for the incentive is less than what is saved by either not replacing the positions, or by replacing the more expensive employees with less expensive new hires.
But these programs bear careful watching. If they become standard practice, they are just another benefit on top of an already generous benefits package before and after retirement.
The Des Moines Public Schools “early retirement” program pays each early retiree an average of about $48,000, up to a maximum of $120,000. Anyone who is 55 years old with at least ten years of service is eligible. Over the past several years the district has averaged about 75 teachers per year who take advantage of the program, therefore the total cost is about $3.6 million each year it is offered. An early retiree is typically costing the district about $90,000 per year prior to retirement, so on the surface it appears to be a good bargain — $90,000 per year of ongoing savings for $48,000 in one-time cost. When retirees are replaced with new staff, the difference in salary and benefits between the retiring teacher and the new hire is about $27,000 each, per year.
However, the district’s current early retirement program is of questionable value even under the most extreme circumstances, i.e. when significant staff reductions are necessary and no replacements are planned. That’s because it has become an expectation, and is therefore no longer really influencing retirement behavior.
Figures from the Iowa Public Employee Retirement System (IPERS) suggest that over the past several years, of the average 75 teachers that have taken advantage of the program each year, about 60 would have been expected to retire even without the incentive. This means the district spends $3.6 million to influence 15 decisions. Is enough “saved” from the 15 people to offset the $3.6 million that is spent? In other words, would these 15 have otherwise worked enough longer to generate more than $3.6 million in expense? At a $90,000 per year cost, we would have to assume that each would have otherwise worked another three years. It’s possible, but not likely.
When retirees are replaced with new staff, as would be the case now, there is just no way the math can work for taxpayers. Again, consider the payout of $3.6 million, truly influencing 15 decisions at a cost of $240,000 each. In this case we know the savings per retiree is about $27,000 per year (and declining each year), rather than the whole salary. Just to break even, we would have to assume that each of the 15 retirees would have otherwise worked at least another ten years. This is outside the realm of probability.
While the district’s early retirement program with planned replacements is never a good thing for taxpayers, sometimes it proceeds anyway because the savings occur in the general fund, where limits are in place, while the cost is charged to another fund, which doesn’t have limits. Under extreme budget pressures the district might rationalize such a move, but when there are no budget pressures, it simply doesn’t make sense. There are no financial nor policy reasons to offer the program.
The Des Moines schools are being urged by employees to extend the program. In spite of clear language stating the plan is offered by the Board “in its sole discretion on an annual basis,” they argue its availability has been counted upon by scores of upcoming retirees. If this is the case, it certainly is not an “incentive” program; it is an employee benefit. The district already offers generous salaries and benefits, for example paying 100 percent of single and family health insurance. Starting July 1, 2014, the cost of a family plan will be nearly $19,000 per year.
Pension benefits are also generous, particularly in comparison with private sector retirement plans. Consider a 65-year-old teacher retiring today after 35 years with an average final salary of $64,500. This individual is guaranteed to receive about $40,000 per year from IPERS, plus another $24,000 per year in social security, equaling about 100 percent of average pre-retirement salary. Since the retiree would no longer be paying for social security nor making a pension contribution out of this income (which together amount to about 12 percent of income), he or she is financially better off in retirement than working. In fairness it should be noted that under IPERS, employees cover 40 percent of the required contributions.
Another argument is that employees avoided the use of sick leave days in order to “earn” the benefit. Hopefully employees avoid the use of sick days unless they are sick, in which case they should use them.
Under Iowa law, school districts have very little discretion when it comes to salary and benefit decisions. This is one of very few instances where the Board can exercise its judgment based on what makes the most sense. Just because the Board has offered the benefit every year, it doesn’t mean it was the right decision. It is better to stop a poor practice now, rather than to continue it just because it has always been done.