The Retirement and Social Security Law (RSSL) establishes the benefits for members and the benefit options employers can choose for their employees. The Retirement System administers those benefits. The RSSL also establishes the overall methodology used to make sure we have assets available to pay for those benefits. Generally, choosing to offer your employees better retirement plans or benefit options results in a higher annual cost.
Rates and the Common Retirement Fund
The value of the Common Retirement Fund (the Fund) and the rate of return on our investments directly affect annual contribution rates.
The Fund’s assets come from three main sources: employee or member contributions, investment income and employer contribution. Over the last 20 years, from April 1, 1993 through March 31, 2013, investments have provided 80 percent of the Fund’s income.
Employee contributions, employer contributions and investment income are the three sources of the Common Retirement Fund’s assets. This pie chart shows that, over the last two decades, from April 1, 1993 through March 31, 2013, employee contributions have amounted to $5.9 billion, or 3% of the Fund’s assets. Employer contributions over this same period have totaled $35.9 billion, or 17% of the Fund’s assets. But it’s been investment income which has comprised the largest chunk — $171.5 billion, or 80% of the Fund’s assets over this span.
Each year, we evaluate the Fund’s assets and compare the value of those assets to the funds needed to pay current and future benefits. The difference between these two amounts is spread over the future working lifetimes of active members to determine annual contribution rates.
The return on Retirement System investments affects the annual contribution rates. When the Fund’s investments earn a larger than expected return, the annual contribution rates normally decrease. Conversely, when the rate of return falls short of projections, the contribution rates normally increase. (We assume a 7.5 percent annual rate of return on our investments.) The System’s actuary is responsible for determining the contribution rates each year.