The Legislative Commission on Pensions and Retirement secured a $600 million investment target to shore up our public pension systems, provide one-time cost-of-living increases to retirees, offer a new Secure Choice retirement plan for all Minnesotans, provide treatment resources for PTSD duty disability applicants, and lower the normal retirement age for teachers.
Cost-of-Living Adjustments (COLAs) Increased
The legislature provided, upon recommendation by the governor, all state pension plan retirees with a one-time, 2.5% cost-of-living-adjustment (COLA) increase for 2024. To be eligible, retirees must have received at least 12 months of pension payments as of June 30, 2023. The legislation provides an additional COLA of 1.45% for basic members, who do not receive Social Security and have not benefited from federal Social Security increases.
Lowered Investment Rate of Return Assumption
The assumed rate of return, or discount rate, for all state pension plans is lowered from 7.5% to 7%. The investment rate of return is factored into the assets of the pension plans as a long-term assumption of how much the pension funds will grow as they are invested by the State Board of Investment (SBI) in financial securities. Actuaries for all the pension plans have recommended the state should lower the rate of return because 7.5% growth is too optimistic of an assumption over the long-term.
Secure Choice Retirement Program
The Minnesota Secure Choice Retirement Program will create a public-private partnership model for privately employed individuals to save for retirement if their employer does not already provide a retirement plan.
According to U.S. Census Bureau data from 2017, 49% of adults ages 55 to 66 had no personal retirement savings. According to Vanguard, Americans between 25 and 34 have median 401(k) balances of just over $14,000. The financial firm Fidelity recommends saving at least the equivalent of your salary by 30, three times your salary by 40, six times by 50, eight times by 60 and 10 times by 67, however nearly 55% of Americans say they are behind that rate.
This program will opt-in individuals who are not provided a retirement plan by their employer by setting aside a certain percentage of pay toward retirement, to be invested by the State Board of Investment through an independent retirement account or IRA. Employees may opt out of the payroll deduction if they choose, but employers will be required to initially set up the payroll deduction. This initiative has seen success in other states and will help to reduce the inequality of retirement savings among Minnesotans.
PTSD Duty Disability Reform
Legislation passed to address the growing trend of public safety duty disability claims related to post-traumatic stress disorder and the strain these claims have put on local government budgets and statewide pension systems. The legislature provided $104 million to reimburse employers for the health insurance costs of public safety duty disability beneficiaries, provide mental health treatment and wellness programs, and administer these benefits through the pension systems.
According to the Public Employees Retirement Association (PERA), the funding ratio in the PERA-Police and Fire (P&F) Plan dropped sharply in 2022, with the increased number of duty disability claims being a contributing factor. 80% of duty disability applications in the past few years are related to post-traumatic stress disorder (PTSD).
The legislation will require duty disability applicants to undergo 24 weeks of mental health treatment prior to being eligible to apply for duty disability status but will also require employers to continue to pay the employees’ full salary and benefits during this time. The legislature will also reimburse employers for the health care costs associated with public safety workers necessary to allow them to reenter the profession. If employees are unable to reenter the profession but can return to light duty work and receive supplemental salaries, the legislation implements benefit offsets to provide parity with active public safety salaries in comparable positions.
The legislation also increases total and permanent duty disability benefits to 99 percent (from 60 percent) of a member’s average salary for PERA Correctional, PERA Police and Fire, and State Patrol members.
Teacher Retirement Age Lowered
Legislation passed to lower the normal retirement age for Minnesota teachers from 66 years of age to 65 for ‘Tier 2’ teachers, who are ineligible for Rule of 90 since they were hired after June 30, 1989. Normal retirement age is the age at which a teacher can begin to take a full pension without any reduction for early retirement. Rule of 90 Tier 1 teachers are able to retire early without penalty if their years of service and age equals 90 or more.
Tier 2 Minnesota teachers have one of the highest normal retirement ages in the country; this legislation seeks to address this inequity and provide an improved benefit for active teachers by allowing them to retire without penalty one year earlier than they previously could retire. This change will align our teacher pensions with other teacher pension funds across the nation and make Minnesota more competitive with surrounding states.
Teachers will pay an additional .25% of their salary for this improved benefit and school districts will contribute an additional .75% of payroll. The employer cost for this benefit improvement will be fully covered through $101.9 million in ongoing pension adjustment aid beginning in fiscal year 2026.
Did not pass:
Rule of 90 for Teachers
Proposals to reimplement Rule of 90 for teachers hired after June 30, 1989 did not become law this session. Reimplementing Rule of 90 would have been cost prohibitive, with estimates as high as $3.3 billion in addition to ongoing cost to pay for the benefit improvement for future teachers. If the increased liabilities for Rule of 90 are not fully addressed through significant increases in employee contributions, employer contributions, and state aid, it would jeopardize the financial stability of the teachers’ pension plan to the detriment of retirees, active and future generations of teachers, and taxpayers.
The reduction in the normal retirement age of teachers from 66 to 65 was a compromise proposal that provides over $100 million in ongoing pension aid to allow teachers to retire earlier than many other public employees not in the education field.