By now, you’ve probably heard there’s a new way to fund retiree cost-of-living increases – and employers are at the heart of the change.
Lawmakers recently passed Act 184 that adds a new component to the total employer contribution rate. This new component will be known as the PBI account funding rate (AFC rate) and will directly fund permanent benefit increases (PBIs).
Starting July 1, 2024, the AFC rate will equal one-half the projected decrease in the total employer contribution rate. Each year thereafter, the rate would grow by one-half of any projected employer rate decrease, until the AFC rate reaches 2.5% of payroll. It is anticipated that the new funding model will provide a 2% PBI every two to three years.
Prior to Act 184, employers indirectly paid for PBIs – essentially, the cost of each PBI granted was embedded in the employers’ shared unfunded accrued liability (UAL) payment over a 10-year period. For both employers funding PBIs and legislators granting them, the new model is a more upfront, transparent, and fiscally responsible way to pay for retiree benefit increases.
Thanks to sensible pension reforms in recent years that prioritized paying off retirement debt, employer contributions have declined for six consecutive years and are projected to continue to fall, even with the inclusion of the AFC rate. Still, to protect employer costs, the new law has built-in employer safeguards. Deposits into the new PBI account cannot exceed 2.5% of payroll. Furthermore, the total employer contribution rate will be capped at 24% through FY 2039; thereafter the cap will be 16%.
Deposits will occur every year unless an employer safeguard prevents one from being made. Additionally, to control the cost of future PBIs, Act 184 established new eligibility criteria to receive a PBI. When the first benefit increase is payable under the new model, regular retirees must be at least age 62 and have been receiving a benefit for at least two years. Under current eligibility criteria, a regular retiree must be at least age 60 and have been receiving a benefit for at least one year.
