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Updated: Thursday, 28 Jun 2012, 11:50 PM EDT
Published : Thursday, 28 Jun 2012, 11:46 PM EDT
INDIANAPOLIS (WISH) - How would you like to retire early with a pension that pays you for years you didn't work? I-Team 8 found hundreds of public employees in Indiana doing exactly that. The question is: Who’s footing the bill?
The practice is known as “service time,” but it’s more commonly referred to as "air time" - as in benefits paid out for time being pulled out of thin air.
In the basement of Indiana Public Retirement System headquarters across from the Indiana Statehouse, a growing number of public employees - from teachers and police officers to accountants and auditors - have lined up to buy time over the last 10 years.
“It's another way that a member can participate in retirement,” explained INPRS Communications Director Jeff Hutson. “If they say, ‘I want to put some money into my retirement,’ they can purchase service credit if they're qualified to do so.”
It's an idea the private sector rejected years ago, but service purchases are on the rise in the public sector. At least 21 states now offer the perk.
Indiana joined the list in 2002.
According to the INPRS handbook, public employees with at least 10 years of combined Public Employees Retirement Fund (PERF) or Teachers Retirement Fund (TRF) service may purchase one year of "air time" for every five years of actual service, allowing them to retire up to five years earlier with full pension benefits - including for the years they didn't work.
In most states, the policy was intended to encourage early retirement, thus saving states money on higher salaries. But a recent analysis by USA Today suggests those enrolled in the program in participating states have instead seen their pension payouts boosted by as much as 25 percent.
But Hutson says there is no data suggesting that rapid rise in payouts has happened in Indiana.
“The average person is going to buy about two years of service, and maybe pay between $8,000 and $20,000 dollars, depending on their wages. Then [they will] get maybe $50 a month out of it,” he said.
It's all billed as "risk free" to taxpayers.
"Our mandate is to make sure that this does not cost the taxpayer,” Hutson said. “This is a benefit that the member is supposed to pay for themselves.”
Some aren’t convinced that will happen.
INDIANA’S BEST GUESS
“It's really not fair to taxpayers in my opinion,” said WISH-TV financial expert Peter Dunn. "To me, it's a matter of inefficiency. It's based on actuarial tables. People determine how long you will live, based on your age and health and all those other things. Occasionally, they're going to guess wrong."
When they do guess wrong, taxpayers can be put on the hook to make up the difference.
According to INPRS records, 628 employees have purchased "air time" in Indiana since 2007, contributing nearly $7 million of their own money to the public retirement system. That averages out to about $10,000 per person. INPRS says very few of those employees have gotten any of that money back so far, since only a handful of them have already retired.
"[Employees who retire with air time benefits] is about 10 people a month. We're retiring about 500 people a month. So, it's very few,” Hutson said.
“Very few are taking advantage of it, because it's quite a large amount of money,” said Indiana Retired Teachers Association President Andy Thomas. “Very few of our members have enrolled in the program.”
For Dunn, that’s irrelevant.
“The fact that not many people are taking advantage of it, to me, is not justification that it's not a bad idea,” he said. “It's about risk. And there's not much risk in buying up air time. There's always risk when you invest in the open market. What you want to do is find guaranteed lifelong income sources. That's what a pension is. It is a guaranteed lifelong income source. That's why it makes so much sense.”
But Dunn says it doesn’t make sense for taxpayers.
Indiana charges workers to buy air time based on their current salary. But state pensions are calculated based on an employee’s five highest years of pay - usually earned the five years prior to retirement. If the latter number is higher, it’s possible the state may not have charged enough to break even when it pays those air time benefits back.
For the "average" worker buying around $10,000 in air time purchases, the “break even point” happens around 17 years after retirement - though some may hit the mark earlier or later.
“The individual who we expect to live to be 85 and they live to be 90, maybe they pick up a little bit more,” Hutson admitted. “But the individual that lives to be 75 and we thought 90, maybe they [get] a little bit less.”
“[The State of Indiana] misses their estimates frequently - almost monthly. And that's OK, because they're just estimates. But the fact that they're relying on these same estimates to say why this loophole still makes sense? I don't put a lot of faith in them. People are living 30-40 years into retirement.
That's going to be a real stress on the pension system,” Dunn said.
It's a system that's already about to crack.
Last year, I Team 8 exposed a massive shortfall in the amount Indiana has in the bank to pay its pension obligations. A Pew Foundation on the States study released in late June estimates the state’s unfunded liabilities are now at $14 billion and growing. A 2010 study by Professors Robert Novy-Marx of the University of Chicago and Joshua Rauh of Northwestern University’s Kellogg Graduate School of Management predicts the state would go broke by 2020 if it continues to pay its pension obligations without taking drastic steps to change how those pensions are funded.
Some lawmakers say air time is only complicating the problem.
Asked if taxpayers are put at risk through the current air time system, Senate Employment, Labor and Pensions Committee Chairman Phil Boots nodded.
“I feel they are,” he said. “It's a program we have in place to provide a pension to retirees.To get an increased benefit, then you should have to pay for it. I don't think the taxpayers should be obligated for this. If it's actuarially cost-neutral to the pension fund, then I would approve of that. But if it costs the taxpayers extra dollars to provide an extra benefit, then I don't believe that's a proper way to go.”
“We keep kicking the can down the road, allowing the pension funds to further deteriorate,” Sen. Boots continued. “It's not getting any better. So, we need to tighten up everything - all of our pension funds - and make sure we're funding them as we promised. There's no exact science to [air time]. The future is unknown.”
And not just in Indiana.
AIR TIME ATTACKS
Across the country air time is under attack.
The State of Texas reduced the amount of air time workers can buy in 2005 after learning the state was paying out more than it was taking in. Legislators in California and Kentucky discussed barring the perk last year. Some have promised to reintroduce those bills this year. New Hampshire lawmakers voted to do away with their air time program after a study there showed taxpayers shelled out between $25 million and $40 million to cover the costs of "longevity miscalculations."
Asked if there are safeguards in place to prevent those miscalculations from happening in Indiana, Hutson nodded.
“The main thing is getting outside actuaries involved and saying, ‘We're going to help you understand what this is going to cost.’ I've heard it called educated guesses, but these guys do the math,” he said.
“It's really hard to compare to other states, because some of the other states have completely different policies,” said Thomas.
Still, with new state employees "buying time" every year, the question remains: will the clock on Indiana’s air time purchasing policy eventually run out?
“It is a loophole,” Dunn said. “It is antiquated. It will go the way of the typewriter. It's just a matter of time.”