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At Valley Financial Services, we recently received a call from an individual who retired from the California Department of Corrections and Rehabilitation more than ten years ago. The person called about a letter received from CalPERS explaining a reduction in their monthly pension benefit!
Internal Revenue Code (IRC) 415b limits pension benefits for those retiring at age 62 or later to $220,000 per year. Unfortunately, there is an age adjustment for those who retire before age 62 except for police, fire fighters, and emergency medical personnel. No exception is made for retired correctional officers!
The age adjustment means if you retired earlier than age 62, the maximum pension benefit will be reduced below $220,000 per year. In fact, the California Correctional Peace Officers Association (CCPOA) is now predicting its membership receiving retirement benefits above $100,000 per year will be affected by the age adjustment!
According to the CalPERS letter, if calculations for an indvidual retiree suggest a reduction is in order, the difference will only be made up if the former employer agress to pay that amount into the CalPERS Replacement Benefit Plan (RBP).
In a recent press conference, Governor Brown said during the next recession he believes the state will consider going to court for permission to reduce California pensions. Most likely, the RBP will be the beachhead for this battle. The state could argue pension benefits exceeding the IRC 415b limit should not be funded as they are "excessive". If California refuses to fund the RBP for retirees, then the reduction in your CalPERS pension will become permanent.
CCPOA should not challenge the IRS on the 415b limit itself. Instead, they should focus their energy and resources for inclusion of correctional officers on the list of employees exempt from the age adjustment calculation. And it would be best to pursue this change before the next economic down turn, otherwise a significant number of CCPOA retirees could see a substantial reduction in their pensions!
The views expressed are those of Lindsey Randolph and should not be construed as investment advice. All economic information is historical and not indicative of future results. All information is believed to be from reliable sources; however, we make no representations as to its completeness or accuracy. Discuss all information with your advisor prior to implementation.