Pension Portability

The Administration and Congress are continually reexamining the nation's retirement policy. One area that is beginning to receive increased attention as the workforce becomes more mobile is pension portability. Generally speaking, pension portability refers to the ability of mobile workers to retain undiminished rights to retirement benefits. While there are a variety of avenues for increasing portability, many public employee retirement systems permit extensive portability of service, especially within a state. Portability of service can make a substantial difference in a defined benefit plan where a formula that combines years of service and final pay is used to determine benefit amounts.

Public employee retirement systems frequently provide for portability of service between systems by allowing purchase of service credit for prior periods of employment in other jurisdictions. Some jurisdictions, in efforts to assist employees in preparing for retirement, also allow purchase of service credit in other situations, including previous employment with private sector entities or previous periods of unemployment. Usually, public sector employees purchase service credit through employee contributions sufficient to cover all or part of the long-term cost to the retirement system of providing the increased benefits. These are often costly purchases and public employees frequently lack the financial resources to purchase these service credits until just prior to retirement.

Pension portability is frequently curtailed by certain provisions of federal tax law. Federal laws and regulations place restrictions on the amount that may be paid to a qualified plan during a twelve-month period and, while designed to apply to defined contribution plans, they also affect defined benefit plans. These restrictions may impinge on the efforts of public sector defined benefit plans to comply with state constitutional provisions. Further, as they are based on current compensation, the restrictions fall most heavily on part-time and low-paid workers seeking to obtain a full retirement benefit by purchasing service credit. For millions of state and local government employees who may choose to purchase service credit. For millions of state and local government employees who may choose to purchase service credit, these federal restrictions are often times counterproductive to the goals of achieving pension portability.

GFOA Position

The Government Finance Officers Association (GFOA) supports efforts to modify federal restrictions on the amount of contributions that may be paid to a qualified pension plan during a 12-month period. These changes will permit public employee retirement systems to achieve the maximum portability permitted by state laws and plan provisions.

• Publication date: June 1997