If you’re like most public workers, you probably have to work five to seven years before you can qualify for any pension benefits. Reaching this threshold is known as vesting.
What is Vesting in Public Pensions?
Before vesting, no pension benefits are guaranteed. If individuals enrolled in a pension plan leave employment before vesting, they are only entitled to receive back their own contributions.[1]
The number of years required to vest is the minimum necessary to qualify for claiming a future retirement benefit. Qualifications to claim a pension are usually a combination of years of service and age.
Vesting Thresholds
For example, a common qualification threshold is 60 years old and at least 10 years of service. Another common qualification is the “Rule of 90,” where the threshold to cross is any combination of age and years of service that add up to 90, such as 65 years old with 25 years of service.
How Have Average Vesting Periods Changed?
One way that states have changed public sector pension plans over the past few decades is to increase the number of years required to vest. For example, in 2008 the average vesting period for pension plans covering teachers was 5.5 years. But in the aftermath of the financial crisis, more than a dozen states increased their pension vesting periods.
Today, the average vesting point for teacher plans open to new hires is 5.9 years.
Some argue that longer vesting periods help retain teachers, though there isn’t strong research to back up this claim.[2] The reality is that longer vesting periods mean fewer teachers will receive pension benefits.
Notes
- The exception to this rule is the South Dakota Retirement System, which will refund to a nonvested member upon leaving employment 100% of employee contributions and 75% of employer contributions on their behalf. SDRS is very rare in offering this kind of pension benefit.
- There is only limited empirical research on the effects of vesting periods. While it is possible that longer vesting periods might keep teachers who have spent four years in the workforce another year to reach a fifth year if vesting is at five years, teacher exit surveys suggest life events (such as having a child or a change in a spouse’s job), changes in job preferences, and school leadership are driving factors in causing teachers to leave their jobs — none of which are influenced by vesting periods.
This article is part of Equable’s Pension Basics series. To learn more about how your pension works, check out the other articles in the series:
1. How Pension Benefits Are Calculated
2. Vesting
3. The Pension Funding Formula
5. Normal Cost
6. Unfunded Liabilities (aka Pension Debt)
7. Actuarially Determined Contributions
10. Governance
11. Pension Myths & Facts: The Assumed Rate of Return Does Not Determine the Value of Benefits
12. Pension Myths & Facts: The Funded Status of Pension Plans Does Not Depend on More Public Employees
