Public employees, including thousands who work in Indiana’s justice system, face a looming change in retirement benefits that could cost them. Estate-planning attorneys say government workers who are considering retirement in the next couple of years should weigh their options carefully.
Effective Oct. 1, the Indiana Public Retirement System will reduce the guaranteed interest rate for workers who choose to annuitize investments in their annuity savings accounts. Employees covered by the Public Employees’ Retirement Fund have 3 percent of their salary invested in those accounts and may elect to invest a greater portion of their earnings.
But the interest rate the state previously guaranteed on those annuities has proved to be unsustainable. Like many other states, Indiana’s promises to public employees resulted in hundreds of millions of dollars in unfunded obligations.
INPRS, which administers PERF, stresses that the annuity is just part of a retiree’s benefits, in addition to a defined pension. Also, annuitizing the savings account is just one of several options for retiring workers. A retiree instead may choose to take a lump-sum payout or roll the money over into another investment vehicle.
Indianapolis attorney Joseph Hankins said employees owe it to themselves to make sure they don’t get short-changed. “Some people will choose to hit the ‘annuitize’ button and be done with it,” he said.
But that could be a costly decision for people retiring after Oct. 1. That’s when the state will reduce the return on PERF annuities from an annual interest rate of 6.75 percent to 5.75 percent. In real terms, someone who annuitizes $50,000 in savings after Oct. 1 will receive almost $100 less per month than would be received by someone who retires before Oct. 1 and opts for an annuity.
INPRS says the change was needed because Americans are living longer and guaranteed rates of return on investment have fallen. The change has prompted units of government to alert workers about how their retirement benefits may be affected.
Changes to the system were contained in HEA 1075, which Gov. Mike Pence signed into law this year. The legislation reduces the interest rate in two steps – the cut from 6.75 percent to 5.75 percent effective Oct. 1, and a further reduction to 4.5 percent on annuitized benefits after Oct. 1, 2015. The reductions apply to PERF as well as annuitized Teacher Retirement Fund benefits.
“We do not have specific estimates on the number of judiciary employees and/or all PERF and TRF members who may be retiring this year,” said Jennifer Dunlap, spokeswoman for INPRS. “We’ve seen about a 30 percent increase in overall attendance at our retirement workshops.”
Longtime Schererville attorney John O’Drobinak has advised clients who are PERF beneficiaries, and he’s one himself, having worked 19 years as a probate commissioner. “They’re going to take a pretty good hit if they annuitize” after Oct. 1, he said.
“I feel this is an effort to ensure the state doesn’t find itself in the position other states are in,” he said of unfunded pension obligations. INPRS on its website says actuaries estimated the system faced a potential loss of $181 million for current annuities, and that could have risen to $343 million if there had been no changes.
The changes have no impact on current PERF or TRF retirees, INPRS says. According to the system, there are about 73,000 current PERF benefit recipients and about 145,000 active members who will be eligible for benefits. That’s roughly twice the number receiving or eligible for TRF benefits.
Dunlap said about half of the PERF and TRF retirees choose to annuitize their annuity savings accounts through INPRS.
O’Drobinak doubts he would advise anyone to choose an annuity at the lower rates the state will enact after Oct. 1. People could likely earn a greater rate of return by rolling the money into a private-market investment, he said. Lawmakers were slow to allow INPRS to turn to the private market for investment advice, he explained, something the system will be allowed to do in 2017 under HEA 1075.
O’Drobinak took a lump-sum payout of his annuity savings when he retired, and he had closely compared his options – something he’s concerned many people, PERF or not, don’t do.
“I don’t think people who are going to retire put a lot of thought into what they’re going to do until just before they’re going to retire,” O’Drobinak said.
At a recent meeting of the Marion Superior Executive Committee, judges chose to send emails to all court employees informing them of the coming change. For some, a possible benefit reduction could prompt a choice to retire sooner than they might have planned.
For employees who might be thinking of doing just that, “They need to hurry up and make a decision,” said John Galloway, training manager for the city of Indianapolis, to make certain their final service day falls before Oct. 1.
Galloway said the city arranged an information session for employees, but so many people responded that two additional sessions had to be scheduled.
Foremost, Galloway tells employees they need to be sure they can afford to retire and make sure they’ve done adequate financial planning.
Most court employees are covered by PERF. Judges and prosecutors, however, are covered by separate retirement funds administered by INPRS.
Hankins, the Indianapolis attorney, said lawmakers appeared to have no choice but to throttle down the PERF annuity interest rate or run the risk of the program becoming insolvent. But people thinking of retiring from the system do have choices.
Expediting retirement “could be a decision some employees make once they take an informed look,” Hankins said. That would include looking at various scenarios, such as whether increased annuity saving fund balances generated by working longer might offset losses from payouts at lower rates of interest.
“I would really urge anyone contemplating retirement, it’s really important to sit down with trained professionals who can help them make informed decisions,” he said.•