Given millennials' dire outlook on the reliability of Social Security in their retirement, many are showing increasing interest in other types of retirement programs (these include direct benefit plans, or "pensions"). In fact, according to a 2016 Colorado-based survey conducted by the National Institute on Retirement Security, 88% of younger Coloradans have a favorable view of direct benefit plans, and 78% believe that Americans who have pensions are more likely to have a secure retirement.
Some direct benefit plans offer alternatives without contributing to Social Security—and that's good news to many millennials. In a 2014 Pew Research Center survey, 51% of millennials said they didn't believe there would be any money for them in the Social Security system by the time they're ready to retire, and an additional 39% said that the system would only be able to provide them with retirement benefits at reduced levels. Fast-forward three years, and their outlook has only become bleaker: According to an Investopia survey, 81% of millennials weren't confident that they would receive Social Security benefits when they retire. Yikes.
If only there was an alternative to Social Security—a secure retirement plan we could bank on being there for our lifetime when it's our time to retire (oh, and even better: that would also give us back everything we put in—and more)…
(That's our hint for you to read on.)
Did you know that Colorado PERA's defined benefit plan is a substitute for Social Security? That means PERA employees don't pay into the federal retirement system while working for a PERA employer; instead, they pay into PERA.
But this isn't your grandpa's pension plan. What makes the PERA retirement plan unique is the fact that it blends the best of two worlds: a traditional pension plan and a defined contribution plan (what you probably know better as a 401(k)). Thanks to this unique design, PERA's plan benefits short-term public employees as well as those who spend their entire career in public service. And that's not just according to PERA—that's what an independent, third-party firm commissioned by the Colorado General Assembly found.
According to that firm's report, PERA's hybrid defined benefit plan provides the most income replacement at retirement at the lowest cost (compared to other types of retirement plans in use today, including 401(k)-type defined contribution plans). Regardless of someone's age or length of service, no plan "provides a more effective level of benefits than the PERA hybrid plan." [Cue mic drop.]
The image below shows exactly how PERA's level of income replacement at retirement stacks up against the competition. If you're someone who cares about your retirement security and aren't convinced that Social Security will be there to support you, having the PERA hybrid plan option in your retirement arsenal—whether you end up working in public service for three years or 30 years—will pay off (or more specifically, pay you) in the long run.
So, how exactly does the PERA hybrid plan accommodate short-term employees? It does so through a component known as the Money Purchase Benefit; here's how it works:
- Every dollar contributed by a PERA member (currently 8%, although that may increase if the PERA Board's recommended package of reforms passes this year), is placed in an individual account for that member.
- The member's contributions are credited with interest at a set annual rate that, by law, can’t exceed 5% (it’s currently at 3%).
- When/if the member leaves public service (a.k.a. PERA employment), so long as he or she hasn't refunded or taken out money from the individual account before retirement eligibility is reached, he or she is eligible to receive the Money Purchase Benefit.
- The Money Purchase Benefit that he or she receives is calculated by taking the individual account balance (total member contributions plus interest), adding a 100% match to that balance, and then determining the monthly amount that can be paid out for life using PERA's current long-term assumptions.
Even if a member decides to withdraw his or her money upon leaving PERA employment, that member is able to take all member contributions made plus interest—and, if he or she has worked in the system for five or more years, that becomes all member contributions made, plus a 50% match on those contributions, plus interest.
No matter how you slice it, every PERA member receives more money than he or she puts in—regardless of length of employment. By our account, it would seem the PERA hybrid plan is a good bet for even us "flighty" millennials.