Retirement wave? The math says "No."

A retirement wave is coming - so says the Bergen Record:

Christie wants to cut pension and health benefits for current teachers, but would allow those who retire by Aug. 1 to get a free pass. The state’s largest teachers union says the plan, which has not been submitted to the Legislature yet, could prompt mass retirements. 

The analysis shows more than 29,300 of the state’s nearly 143,750 certified teachers — about 20 percent of the workforce — qualified for retirement, either through age or years worked, according to data from the 2008-09 school year, the latest available. 

OK, a quick primer on the teachers pension system. You take every year you work and divide it by 55. Then you multiply that fraction by the average of your last three years' salary. The result is your yearly pension.

We obviously don't know the details of Christie's plan yet, but it's safe to say we're talking about two changes for those who retire after August 1: pay part of your pension to your health care premiums for life, and base your pension on the last 5 years of your salary (or more) instead of the last three. That would, ostensibly, bring your average salary down, so your pension would be less.

Hmmm - is this incentive to retire before the changes take effect? Let's see:

We'll start with two teachers in their 35th year - call them Chris and Jon, who were making $80K in 2005. They got 4% raises each year, but their district has imposed a wage freeze for the next TWO years. And they're going to have to pay 1.5% to their health care starting next year.

Assume the Christie plan is to change your average salary period from three years to five, and to contribute 2% of your pension to health care.

Chris is going to take the deal and get out now: "I'm not gonna get stuck paying 2% for the rest of my life on health care!" He retires with a pension of $59,587.

Jon decides he's not ready to go yet and teaches another 2 years like he planned. He retires with a pension of - get ready - $62, 322! AND he has an additional $72,570 in the bank!

Chris can't believe it! What happened? Jon was supposed to get screwed in this deal, not him!

See below for the math, but it all really comes down to three things:

1) Even if you base your pension on your last five years average wage instead of your last three, you're still going to make more money on average if you keep teaching - and that makes your pension bigger. Even if you took a wage freeze this year, you made more than three years ago, and way more than five years ago.

Even if you factor in the 1.5% that you now pay on your health care, even if you assume a wage freeze for the next two years, your average ending salary will still go up, because you will make more next year than you did two years ago. And that makes your average salary over five years go up.

2) Every year you stay on the job, you get a bigger piece of your salary for your pension. If you retire now with 35 years on the job, you will get 35/55ths of your final average salary; if you wait two years, you'll get 37/55ths. Your slice of the pie gets bigger with each passing year.

3) You make more working than retiring. So, if you were prepared to stay on the job - or if, heaven forbid, you LIKE your job (we all know every senior teacher is burned out, because that's what we read...) - you will make more money NOW than collecting your pension, which is just part of your salary.

Yes, I'm not factoring in Social Security - geeze, I've got a life, I can't play around with Excel all day. Yes, the number of years in service makes a difference.

My point is that, even assuming the proposal makes stark changes, the incentive is not going to be very great for a person who could retire but doesn't care to. Might it push those on the edge a bit? Perhaps. Might the Chrises not think this through and make an irrational decision. Of course.

But I really don't think you'll get a big wave of retirements - UNLESS you make the plan much more onerous than the one I've described.

Here's the math, you geek (meaning me):

$62,321.65

$59,586.98

$2,734.67

$72,570.54