What FPE/AFT need to consider when weighing early retirement

Should I stay or should I go? That is a question thousands of state employees may be asking over the coming months as they contemplate taking early retirement offers designed by lawmakers to cut payrolls. From the FPE/AFT's standpoint, the answer is not an easy one.

"We want people to retire early with their eyes wide open," says John Abraham, senior associate director of the AFT's research department. "Our members need to understand the financial implications of leaving early, including the possibility of actuarial reductions in their pension benefits."

Abraham says early retirement decisions should be based on three factors: pension income, cost-of-living adjustments and healthcare. Specifically, Abraham says that an employee's retirement income--money from all retirement income sources, including pensions, Section 457 plans, personal savings and so on--should equal the employee's take-home pay the day before he or she retirees. Moreover, he maintains that decisions to retire early should be based on whether the offering includes cost-of-living adjustments and provides retiree healthcare, including prescription drug coverage, or a wrap-around Medicare policy.

"COLA protection is important because we know inflation will erode the purchasing power of the pension over time," Abraham explains, "and [employer-provided] healthcare for retirees is important because the out-of-pocket costs of insurance will wipe out the value of retirement income."

Additionally, single women and employees with spouses who work in the public sector should take into consideration their Social Security status. As many FPE/AFT members know, Social Security coverage is an elective for state and local government employers. Employees working in states and localities that have not elected to participate in Social Security will not be eligible for Medicare at age 65 unless they or their spouse worked for at least 10 years in Medicare-covered employment.

Alaska, Colorado and Ohio are among the states that do not participate in Social Security. Legislatures in Kansas, Indiana, North Dakota and Pennsylvania are among the states that have discretionary authority over COLAs.

Other factors to take into consideration include: spousal income and whether the potential retiree can afford health benefits under their spouse's plan and Internal Revenue Service penalties for withdrawing money from such retirement income vehicles as Individual Retirement Accounts and Section 457 plans before age 59 1/2.

At press time, lawmakers in several states, including New York and Wisconsin, were considering early retirement proposals specially designed to cut the work force and address current fiscal concerns. Michigan and New Jersey are among the states that have enacted early retirement plans. The details of the passed and proposed plans vary by state.

For example, to be eligible for Michigan's program, an employee's age and years of service must equal 80 by Nov. 1, 2002. One New York proposal, which has the backing of the FPE/AFT-affiliated New York State Public Employees Federation, would allow employees with 25 years of service to retire at age 55 without losing any pension benefits. Currently, employees need to work 30 years to receive the full benefit.