Summary of Retirement and Related Medical Benefits at UPR
Tom Noack
Professor
Electrical and Computer Engineering
Recinto
Universitario de Mayagüez
Abstract
This document summarizes University retirement benefits and related medical insurance issues for people contemplating retirement or working after age 65. It is the result of a recent conversation with two colleagues nearing retirement which revealed the limited amount of information available to them, and that they were likely to have to make that decision based on partial information. This information shortage is especially acute with respect to Medicare and the University’s medical insurance. I have tried to avoid expressing opinions regarding the various forms of discrimination and favoritism in the University’s retirement system; anyone interested can email me. My knowledge of university retirement, social security, and some insurance issues is extensive, but I have little information or access related to some aspects of the University’s insurance coverage, especially for retired people. I would appreciate information regarding any of these issues, especially the coverage and price of the medical insurance offered after retirement.
The document contains four sections: University Retirement, Social Security, Medicare, and medical insurance. Several subsections might be of interest, typical retirement cases, rules of thumb, and summary of the various retirement plans.
Also, a section on the actual bureaucratic process is under construction – at present it contains the checklist of all the items needed to get free of the system.
University
Retirement
The University system is a defined benefit plan financed by employee contributions and an employer contribution. The employee contribution varies from 5% to 9% depending on date of enrollment, tope (maximum income creditable toward benefits) and whether or not benefits are reduced at age 65 (coordinated plan) or not (supplemental plan). This appears to be one of the most misunderstood facets of the plan – what it means is that the benefit drops by 20 to 33 percent upon reaching 65 or retiring if one is already 65. The employer contribution has risen from 7% to 13.7 % over the past 15 years or so. The relationship between years of service and benefits is a concave nonlinearity as shown in the charts and tables. This relationship is independent of age at retirement, except for those retiring before age 55 or 58, depending on the specific plan. The benefit for a faculty member retiring on at least 25 years of service can vary from $11K to $37K per year – for one retiring on 20 years, even at age 70 or more, it can be as low as $7K. The benefit paid has only a slight relationship with the amount of employee contribution; it seems to be more closely related to whether the person is about or below the tope and whether the person chose the coordinated or supplemental plan.
Typical retirement cases:
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Representative UPR
Retirement Cases |
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Salary |
Description |
Hired |
Retired |
Served |
Pension |
Value |
SS |
Contrib. |
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$12,000 |
7%, nonworking spouse |
20 |
50 |
30 |
$9,000 |
$123,883 |
$10,880 |
$11,035 |
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$24,000 |
9%, nonworking spouse |
25 |
55 |
30 |
$18,000 |
$230,100 |
$22,360 |
$22,070 |
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$50,000 |
9%, working spouse, MSEE |
25 |
55 |
30 |
$37,500 |
$479,376 |
$27,000 |
$32,000 |
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$50,000 |
9%, working spouse, PhD, other |
30 |
60 |
30 |
$37,500 |
$430,122 |
$27,000 |
$32,000 |
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$60,000 |
7%, nonworking spouse, PhDEE |
47 |
67 |
20 |
$10,500 |
$92,953 |
$18,000 |
$49,000 |
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$60,000 |
7%, working spouse, PhDEE |
47 |
72 |
25 |
$15,313 |
$95,091 |
$18,000 |
$61,000 |
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$60,000 |
9%, working spouse, PhDEE |
47 |
67 |
20 |
$15,000 |
$132,790 |
$18,000 |
$63,000 |
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$60,000 |
9%, working spouse, PhDEE |
33 |
63 |
30 |
$37,500 |
$392,897 |
$27,000 |
$70,000 |
Notes:
- Present value of the pension is based on 7% interest and age at death of 80. This is not far from the mortality table value.
- Contribution is the actual amount contributed. A present value analysis would raise this value considerably, almost doubling it in all cases. This amount does take into account wage inflation and the tope over past years.
- Over time, the employer contribution has been slightly greater than the employee contribution. Consequently, the total present value of both contributions is approximately four times the value shown here.
- The Social Security benefit shown is the present value – unlike the pension it grows with inflation.
- The academic cases include the amount paid to increase the tope to $50,000.
Rules
of thumb:
1. If you plan to retire before age 65, investigate the University’s medical coverage before doing so.
2. If you have 30 years, are below the tope, and can retire at full benefits, either because of age or open window, do so unless medical coverage is an issue. The taxes, retirement contribution, and Social Security and Medicare taxes will more than cover the 25% income drop.
3. If you are above 65 and have 30 years, retire immediately. You have medical coverage and you will have a large income jump.
4. If you don’t have 30 years, hang in there until you do. The recent time-buying option is rarely worth it.
5. If you are above the tope and have less than 30 years, you have a miniscule retirement benefit. Keep working, even though you are paying for the others to retire. Think often of how bored they must be.
6. If you are thinking of collecting Social Security before 65, consider a loan instead. This is especially true if you have a nonworking spouse. Check www.ssa.gov for details.
The various retirement plans:
Certification summary
· Retirement regulations, January 1979 – these cover certifications 7 and 37
· Certification 7, 1973 – pre-1959 entrants, much more liberal than newer plans, (4-6.5%) coordinated, 7% supplemental, no tope
· Certification 37, 1978 – 1959-1989 entrants – increased retirement age, more drastic reduction at age 65. 5% coordinated, 7% supplemental, $35K tope
· Certification 55, – 1990-1998 entrants (4-6.5%) coordinated (?), 8% supplemental, $35K tope
· Certification 94, 1998, – post 1998 entrants - no coordinated, 9% supplemental, $50K tope
Age and service summary – all amounts are based on top 3 years or tope (lower of the two)
· 30 years and more – 75% (60% coordinated) - age 55 or age 58 – reduced before age 55 or 58
· 25-30 years – 43-60% (28-45% coordinated) - can retire at 55 or 58
· 10-25 years – 30-43% (20-28% coordinated) – age 58
Until federal law superseded this provision, retirement was mandatory at age 65; this provision is now invalid.
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Years |
Rate |
Rate - 5% |
Tope - $35K |
$35K - 5% |
Tope - $50K |
$50K - 5% |
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11 |
17% |
11% |
$5,775.00 |
$3,850.00 |
$8,250.00 |
$5,500.00 |
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12 |
18% |
12% |
$6,300.00 |
$4,200.00 |
$9,000.00 |
$6,000.00 |
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13 |
20% |
13% |
$6,825.00 |
$4,550.00 |
$9,750.00 |
$6,500.00 |
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14 |
21% |
14% |
$7,350.00 |
$4,900.00 |
$10,500.00 |
$7,000.00 |
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15 |
23% |
15% |
$7,875.00 |
$5,250.00 |
$11,250.00 |
$7,500.00 |
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16 |
24% |
17 |
26% |
17% |
$8,925.00 |
$5,950.00 |
$12,750.00 |
$8,500.00 |
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18 |
27% |
18% |
$9,450.00 |
$6,300.00 |
$13,500.00 |
$9,000.00 |
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19 |
29% |
19% |
$9,975.00 |
$6,650.00 |
$14,250.00 |
$9,500.00 |
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20 |
30% |
20% |
$10,500.00 |
$7,000.00 |
$15,000.00 |
$10,000.00 |
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21 |
33% |
22% |
$11,392.50 |
$7,717.50 |
$16,275.00 |
$11,025.00 |
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22 |
35% |
24% |
$12,320.00 |
$8,470.00 |
$17,600.00 |
$12,100.00 |
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23 |
38% |
26% |
$13,282.50 |
$9,257.50 |
$18,975.00 |
$13,225.00 |
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24 |
41% |
29% |
$14,280.00 |
$10,080.00 |
$20,400.00 |
$14,400.00 |
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25 |
44% |
31% |
$15,312.50 |
$10,937.50 |
$21,875.00 |
$15,625.00 |
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26 |
47% |
34% |
$16,380.00 |
$11,830.00 |
$23,400.00 |
$16,900.00 |
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27 |
50% |
36% |
$17,482.50 |
$12,757.50 |
$24,975.00 |
$18,225.00 |
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28 |
53% |
39% |
$18,620.00 |
$13,720.00 |
$26,600.00 |
$19,600.00 |
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29 |
57% |
42% |
$19,792.50 |
$14,717.50 |
$28,275.00 |
$21,025.00 |
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30 |
75% |
60% |
$26,250.00 |
$21,000.00 |
$37,500.00 |
$30,000.00 |
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To my knowledge the retirement system has opened two options for individuals to change their retirement plan. These are:
- An option to change from 5% (coordinated – reduced benefits at age 65) to supplemental (no reduction). This required paying the back premium difference (2% of salary up to the current tope, not that in effect during those years) plus interest. For some people, this was very beneficial, for others, marginal.
- An option to increase the tope from $35,000 to $50,000. This required an increase in the employee contribution from 7% to 9% of the salary and also paying back premiums plus interest. The cost of this change was much higher for engineering than for other faculties, at no increase in benefits – for engineering Ph. D.s, it was sometimes in the $20K range, for others it was no more than $4K.
- An option to increase the tope from $35,000 or $50,000 to $60,000. This requires an increase in the employee contribution from 7% or 9% to 11% of the salary and also paying back premiums plus interest. The cost of this change was much higher for engineering than for other faculties, at no increase in benefits – for engineering Ph. D.s, it was sometimes in the $40K range for the change from $35K to $60K, for others making this change it was no more than $20K. For the change from $50K to $60K it was $10K for engineers, at most $5K for others.
Since 1997 an early retirement window (retirement at full benefits regardless of age) has been offered for those with 30 years of service. The withdrawal of this benefit was the issue in last fall’s strike.
Recently an option to retire up to three years early ( for those with 27 or more years of service) was offered – at a typical cost of $90K for the $35K tope, and probably $120K for the $50K tope. This seems to be based on the individual paying the entire retirement to be received, and both the employee and employer contributions. I can think of only two cases where this might be advantageous. One is to take a very good job offer, and the other is catastrophic health reasons. The motivation was probably to establish a rationale for denying access to the early retirement window mentioned above.
Social
Security
Social security retirement benefits are based on a saturation nonlinearity applied to average inflation-adjusted earnings over the entire working career. This nonlinearity is shown below; the slopes are 90%, 32%, and 15%. It now starts at age 65, whether one is employed or not, and can be started at age 62, if one is retired, but with reduced benefits. Until quite recently (2000) people between 65 and 70 effectively could not receive benefits while working, those over 70 could. Over the next number of years, the 65 age will be slowly increased to 67. Because of the saturation nonlinearity, almost all faculty members will get approximately $18K per year, but this grows with cost of living – typically 2 or 3 percent per year, unlike University retirement. For married individuals with non-working spouses, the benefit is 50% higher; when either spouse dies, the other receives the basic benefit for life or until remarriage. This comes at no increase in contributions. Because of the nonlinearity, early retirement, at age 50 or 55, does not reduce the social security benefit greatly when it does arrive.
It should be noted that because of the nonlinearity, Social Security has the effect of a tax on middle income people alone to cover old-age programs that used to be covered by the general funds of individual states. It has the effect of increasing the marginal tax rate on some individuals in PR to over 53% - as opposed to the millionaire’s 36%, a very effective deterrent to taking consulting work.
Medicare
Medicare comes in two varieties – Part A (Hospitalization) and Part B (Out-patient – including emergency room). Part B is secondary to other insurance held by employed people. Federal regulations provide that the insurance offered to over-65 employees cannot differ from that for younger people; thus the social security administration recommends that employed people do not take part B before retirement. Enrollment in Part A is automatic at no cost at age 65; Part B has a deductible and a monthly premium and a yearly deductible; and if you don’t accept it at age 65 it will cost much more if you sign up later. This provision doesn’t apply to working folks – they have to sign up within 2 months after retiring.
With a few exceptions, Medicare applies only to diagnosed illness, not preventive medicine or optional procedures. Medicare information can be found at www.ssa.gov. As mentioned below, Medicare is the secondary payer for working people over 65 – it is the primary payer for retired people. It has a flat per-benefit-period deductible and pays 80 percent after that amount. A benefit period begins with admission and ends 60 days after release.
Other
insurance
The University provides medical insurance for retirees. In recent years this has been provided through Blue Cross, with BC’s collapse, SSS will be the next provider. This has had a monthly premium of $69. As far as I know, this coverage is similar to that offered to current employees; I don’t know how spouses or other dependents are covered. I would suggest that anyone contemplating retirement visit the insurance office and probably the provider to find the details of this coverage.
Medicare is the secondary payer for employed people over 65. It is the primary payer for retired people over 65, thus the University’s policy really only picks up the difference. Again, you should consult with the University’s insurance office or with retired people who have had significant medical expenses.