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Local Government and School Accountability

Retirement Incentive Program

Overview

Brochure [pdf] Adobe pdf

Local government officials should prepare an estimate of all potential costs as well as savings that may result from participating in the incentive program.

This should include for each employee:

  • Estimated base salary savings,
  • Estimated payments to the Retirement System, and
  • Estimates of any other material costs and savings which would impact the total savings to be realized by the local government.

With this information, the local government can make an informed decision on whether hiring new employees to replace those who have retired is in the best financial interests of the local government.

The 2010 Retirement Incentive Program is a temporary program provided for certain New York State and Local Employees’ Retirement System (ERS) members by Chapter 105 of the Laws of 2010.

The Program has two distinct parts:

  • Part A is a targeted incentive for employer-identified eligible titles. This incentive provides one additional month of service credit for each year of credited service an eligible member has at retirement, up to a maximum of three additional years.
  • Part B is not targeted. It is open to all eligible Tier 2, 3, and 4 members whose positions are not deemed critical to the maintenance of public health and safety. Part B allows members who are at least age 55 and have 25 years or more of service credit to retire without a benefit reduction. Employers who participate in ERS must have elected to provide these incentive benefits by August 31, 2010 and September 1, 2010 respectively, in order to offer these benefits to their employees.

Cost Savings Requirement

For employers who opt to participate in the Part A incentive program, the positions targeted for retirement must be eliminated unless the employer develops a savings plan in compliance with requirements stipulated in the law. This savings plan must demonstrate that the combined two-year salaries for new employees hired due to the retirements results in a minimum cost savings of 50 percent of the targeted employees’ combined two-year salaries.

Example of Part A

An employer has one employee who retires under the Part A incentive program. The employee will earn a total of $85,000 this year and would have been expected to earn $87,500 next year. The employer must demonstrate a savings of 50 percent of this employee’s combined two-year salary during the next two years, computed as follows:

Targeted Employee - Salary year 1$85,000
Targeted Employee - Salary Year 2$87,500
Two-Year Salary of Targeted Employee$172,500
Savings Required Over Next Two Years: 50% of $172,500 = $86,250
The employer hires one new employee because of the retirement:
New Employee - Salary Year 1$42,000
New Employee - Salary Year 2$43,500
Two-Year Salary Cost of New Employee$85,500
The cost savings would be computed as follows:
Two-Year Salary Cost of Targeted Employee$172,500
Two-Year Salary Cost of New Employee$85,500
Total Savings Achieved$87,000

The $87,000 total savings achieved over the two-year period exceeds the minimum savings of $86,250 that was required, so the employer is in compliance with the law and does not need to eliminate the targeted position.

The example to the left demonstrates the savings when hiring one new employee in relation to the one targeted employee that retired. If multiple targeted employees were to retire, you would compute the required two-year savings based on all the employees retiring under the incentive. The cost savings requirement is only applicable to employers who participate in Part A of the incentive program. Part B of the incentive program does not have a cost savings requirement.

Additional Cost Considerations

The primary intent of any retirement incentive program is to reduce costs for local governments. It allows local governments to induce employees who are close to or at retirement age, and who generally have higher salaries, to retire. Some of these positions would then be eliminated and other positions would be filled with new employees, whose starting salaries would be much lower than the retired employee.

There are, however, other costs and savings in these incentive programs beyond just the base salaries paid to retired and new employees. For example, along with lower salary costs, the local government will also have lower costs for its share of Social Security and Medicare contributions. On the other hand, the local government also has to pay the cost of the retirement incentive the employee receives, as well as health insurance costs of the retiree. These costs and benefits must be carefully analyzed as a local government decides whether to offer an incentive and how quickly, if at all, a replacement worker can be hired in order for the local government actually to achieve cost savings.

Example of Part B

Continuing with the information from the above example, the employer hires the new employee right away to replace the employee who retired. This new employee will earn $42,000 this year and $43,500 next year, for a total salary cost of $85,500. The employer will achieve additional savings due to the difference in lower costs for Social Security and Medicare contributions for the new hire, amounting to $6,645 over two years. However, the local government is charged the cost of the additional retirement benefits the employee received as an incentive to retire, which are estimated at $85,000.1 Finally, the local government has to pay the costs of the health insurance benefits for the new hire, while continuing to pay for health insurance benefits for the retired employee. These additional health insurance costs total $10,850 over two years. In total then, by hiring a replacement right away, the incentive program actually cost the local government $2,195, as follows:

Two year salary cost of retiring employee$172,500
Two year salary cost of new employee$85,500
Salary Cost Savings$87,000
Plus additional savings:
Lower Social Security & Medicare costs$6,655
Less additional costs:
Retirement Incentive Costs (Tier IV)$85,000
Health Insurance Costs$10,850
Total Overall Cost to Local Government($2,195)

This example illustrates that salary costs are not the only cost considerations that local government employers should evaluate when deciding when, or if, to hire employees to replace those employees that retired under Part A of the incentive program.

Questions?

If you have questions on the 2010 Retirement Incentive Program, please email the New York State and Local Retirement System’s Employer Participation and Education Unit at RTEmpServ@osc.state.ny.us, or call them at (518) 474-0167.


1 A final amount will be provided to the local government by ERS.