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Legislation could increase value of purchasing service credit now

Posted on | June 2, 2010 | 2,357 views | Comments Off

Both the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio are making important recommendations to the Ohio Legislature in order to ensure their ability to cover current and future generations’ pensions. They have examined every aspect of how they collect participants’ contributions and have developed new plans that will alter the retirement status quo should the Legislature approve their recommendations.

One of those changes expected to be approved — how service credit is purchased — will save the two pension systems $60 million annually based on the credit’s 2005 use. Currently, OPERS and STRS subsidize the majority of service credit purchases, so many of the plans’ participants who have purchased it have never paid the full value of the credit.

OPERS and STRS will start asking those participants to pay 100 percent of the liability starting six months after the legislation to change the pension systems is approved. That means there is a window of opportunity to purchase the credit at current rates. That makes this year an excellent time for employees who will be affected by this change to consider evaluating their retirement situations and determine if moving up their plan to purchase service credit could be right for them.

But who, exactly, does this affect?

For an educator who takes a leave of absence, for instance, no interest is currently charged in paying back the STRS deposits accrued during his or her leave, which can be paid back up to two years after the leave is completed. Under the new legislation, there will be no interest-free grace period — a potential difference of thousands of dollars. OPERS and STRS currently ask for 8 percent annual interest after the grace period to help recoup gains that could never be earned without the original deposits.

Other types of service credit that can be purchased include being called away to active duty military service, Ohio public service, past pregnancy leaves, military service prior to public service, out-of-state public service and private teaching, federal service, and restoration of withdrawn service credit from OPERS or STRS. The current rules governing the purchase of any of these service credit scenarios can be found at opers.org (click “Member Handbook” and “Service Credit”) or strsoh.org (click “Active Members” and “Purchasing Service”).

Some service credit purchases will remain free, such as for a military service call-up during a public service career or time away from the job due to a workers’ compensation claim. There also is no change if an employee pulls out of OPERS or STRS, remains or returns to public service and wants to put the money back into either system — all the money withdrawn would have to be paid back plus 8 percent interest annually.

The other question employees should be asking themselves: “Is purchasing service credit worth it?” The answer: It depends.

Generally, employees who can purchase service credit will be able to add to their retirement benefit and won’t have to work longer on the back end of their careers to meet qualification goals — especially since it looks like service qualifications might be changing in the next five years.

However, there are instances where purchasing service credit should be reconsidered, as STRS notes in these circumstances:

• The death of the member before qualifying for retirement. (Survivor benefits may be determined without regard to service credit.)
• Acceptance of disability benefits.
• A short Ohio public career.
• Better investment options. Long-term savings might net a higher return after taxes than the interest STRS Ohio charges to buy the credit.
• Negative impact on Social Security. Many STRS Ohio retirees have potential benefits as the spouse of a Social Security wage earner or because of their own employment under Social Security.

The best way to determine if you should buy service credit is to have a conversation with counselors at OPERS (800-222-7377) or STRS (888-227-7877) who are well versed in the effect, criteria and cost of making such a move.

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