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The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)


STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 6221

April 30, 1984

CIVIL RIGHTS:

Computation of retirement allowance based upon age of members and beneficiaries constituting age discrimination

RETIREMENT AND PENSIONS:

Municipal Employees Retirement System--amount of retirement allowance for members selecting options in relation to age of members and beneficiaries.

1945 PA 135, Sec. 51(1), providing for an optional form of retirement allowance consisting of the actuarial equivalent of the member's straight-life retirement allowance based upon the age of the member and the age of the designated beneficiary, is consistent with the Elliot-Larsen Civil Rights Act, 1976 PA 453, Sec. 202(2).

Honorable Phil Arthurhultz

State Senator

The Capitol

Lansing, Michigan

You have requested my opinion on a question which you stated as follows:

'All age employees regardless of sex pay into the Municipal Employees' Retirement System, the same contribution payment, however, the retiree after age 60 receives less of a retirement allowance than a person retiring at age 60 (.72 percent less for each year over age 60). Is this practice violative of the Civil Rights Act, . . .?'

In the Elliott-Larsen Civil Rights Act, 1976 PA 453, MCLA 37.2101 et seq; MSA 3.548(101) et seq; the Legislature addressed, inter alia, the problem of discrimination in employment. It should be noted that the statute makes no distinction between a public or private employer as to conditions of employment relating to retirement. 1976 PA 453, supra, Sec. 202, provides, in pertinent part:

'(1) An employer shall not:

'(a) Fail or refuse to hire, or recruit, or discharge, or otherwise discriminate against an individual with respect to employment, compensation, or a term, condition, or privilege of employment, because of religion, race, color, national origin, age, sex, height, weight, or marital status.

(2) This section shall not be construed to prohibit the establishment or implementation of a bona fide retirement policy or system which is not a subterfuge to evade the purposes of this section.' (Emphasis added.)

The Municipal Employees' Retirement Act, 1945 PA 135, MCLA 38.601 et seq; MSA 5.4001 et seq; provides for the Municipal Employees' Retirement System (MERS), composed of local government units which voluntarily elect to come under the provisions of the Act to obtain the economies of scale and expertise gained from their combined size.

In 1945 PA 135, supra, Sec. 47c, provision is made for a straight life retirement or optional allowance:

'Upon a member's retirement, as provided in this act, he shall be paid a straight life retirement allowance computed in accordance with the applicable benefit program or programs elected by his participating municipality. Prior to the date his retirement becomes effective, but not thereafter, he may elect to be paid his retirement allowance under an option provided in subsection (a) of section 51 in lieu of a straight life retirement allowance.'

It is noted that sections 48, 48a, 48b, 48c, 50, 50a, and 50c of 1945 PA 135, supra, set forth the various benefit programs from which a participating municipality shall make its election. The benefit program B-1 is set forth in Sec. 48a:

'A benefit program B-1 retirement allowance shall consist of the benefits set forth in this section. The pension portion of the retirement allowance, subdivision (b), is subject to section 47f:

'(a) An annuity which shall be the actuarial equivalent of the member's accumulated contributions standing to his credit in the employees' savings fund at the time of his retirement.

'(b) A pension which when added to the member's annuity will provide a retirement allowance equal to 1.7% of his final average compensation multiplied by the number of years, and fraction of a year, of his credited service.

'(c) In no case shall the pension provided a member who was formerly covered under benefit program B and who became covered under benefit program B-1 by action of his participating municipality be less than the pension benefits provided under benefit program B.'

The benefits paid to a member covered under social security under all of the straight life retirement allowances are based upon a formula that does not utilize age in computing benefits paid. The provisions consider only years of service and final average compensation in computing a pension. Therefore, your assumption that older retirees with equal service receive less is not supported in the statute nor in its application by the retirement board.

The following examples demonstrate the treatment of hypothetical members A & B in like situations but for their respective ages. Each has 15 years of service, final average compensation (FAC) of $20,000.00, and the municipality employing them has elected benefit program B-1.

STRAIGHT LIFE ALLOWANCE

MEMBER A

Age--60 years

Spouse's age--56 years

FAC $20,000.00

Benefit Plan X 1.7% $340.00

Service X 15. years $5,100.00 Annual Regular Service Retirement Allowance (RSRA)

MEMBER B

Age--65 years

Spouse's age--61 years

FAC $20,000.00

Benefit Plan X 1.7% $340.00

Service X 15. years $5,100.00 Annual Regular Service Retirement Allowance (RSRA)

Section 51(1) of 1945 PA 135, supra, provides:

'Before the effective date of a member's retirement, but not thereafter, a member may nominate a beneficiary and elect to be paid a reduced retirement allowance pursuant to option I, II, III or IV set forth in this section, instead of a straight life retirement allowance or, pursuant to rules the board adopts, a covered member may elect to be paid a straight life retirement allowance pursuant to option V. The value of each optional form of retirement allowance shall be the actuarial equivalent, computed as of the effective date of the member's retirement, of the member's straight life retirement allowance. For a retirement allowance which becomes effective after December 31, 1980, the death of a beneficiary shall cancel an optional plan II or III elected at retirement and the amount of the retirement allowance shall revert to the retirant's straight life allowance, effective the month following the notification to the retirement system of the death of the beneficiary.' (Emphasis added.)

Discussions with the actuary employed by the MERS indicated that, in computing the actuarial equivalent of a straight-life retirement allowance, age of the covered member or beneficiary is the only variable considered. The life expectancy of the member and beneficiary will necessarily impact upon the computation of retirement benefits. The life expectancy of a beneficiary gives an indication of how long the beneficiary receives benefits after the death of a retirant. Members who have nominated beneficiaries of different ages, but similarly situated in all other relevant respects; i.e., identical option, age, years of service, and final average compensation, will not receive identical benefits. The member selecting an option in favor of a younger beneficiary will have to pay more for the privilege of having the beneficiary receive benefits over a longer period of time by means of reduced monthly retirement benefits.

In a like fashion, members who are similarily situated in all respects except their respective ages will not receive identical benefits. The older member who has the shorter life expectancy will have a shorter period of time in which to pay for the selected option and, therefore, will receive a smaller benefit.

The following hypothetical examples demonstrate the impact upon the amount of the pension to be received by members A & B in the event each select an option rather than the regular service retirement allowance.

OPTION ALLOWANCE

MEMBER A

Age--60 years

Spouse's Age--56 years

OPTION II

JOINT AND LAST

SURVIVORSHIP ALLOWANCE

(Member and beneficiary

receive same allowance)

$5.100.00 (RSRA) X 0.80446 (Mortality Table)

$4,102.75 Annual Joint and Last Survivorship Allowance

OPTION III

MODIFIED JOINT AND LAST

SURVIVORSHIP ALLOWANCE

(Beneficiary receives 1/2 of

member's allowance)

$5,100.00 (RSRA) X 0.89163 (Mortality Table)

$4,547.31 Annual Modified Joint and Last Survivorship Allowance

MEMBER B

Age--65 years

Spouse's Age--61 years

OPTION II

JOINT AND LAST

SURVIVORSHIP ALLOWANCE

$5,100.00 (RSRA) X 0.75587 (Mortality Table)

$3,854.94 Annual Joint and Last Survivorship Allowance

OPTION III

MODIFIED JOINT AND LAST

SURVIVORSHIP ALLOWANCE

$5,100.00 (RSRA) X 0.86096 (Mortality Table)

$4,390.90 Annual Modified Joint and Last Survivorship Allowance

Although member B is older than member A at the time of retirement, and based upon life expectancy will draw the benefit allowance for a lesser period of time, B will have a lesser period of time than A in which to pay for the selected option benefit for B's spouse, resulting in a smaller benefit allowance for member B under either option selected. Upon the death of member B, B's beneficiary will receive, depending upon the option selected, the same or 1/2 of the benefit allowance received by B.

The establishment of optional retirement allowances is not limited to the MERS, and similar provisions are found in the State Employees' Retirement System, 1943 PA 240, Sec. 31, MCLA 38.31 et seq; MSA 3.981(31) and the Public School Employees' Retirement System, 1980 PA 300, Sec. 85. MCLA 38.1385; MSA 15.893(195).

The United States Supreme Court has indicated that the question of fairness to the various classes affected by a statute is essentially a matter of policy for the Legislature to address. 'Actuarial studies could unquestionably identify differences in life expectancy . . .' City of Los Angeles, Dept of Water & Power v Manhart, 435 US 702, 709; 98 S Ct 1370; 55 L Ed 2d 657 (1978).

In United Air Lines, Inc v McMann, 434 US 192, 207; 98 S Ct 444; 54 L Ed 2d 402 (1977), Justice White, in a concurring opinion, makes reference to the fact that all retirement plans necessarily make distinctions based upon age.

OAG, 1981-1982, No 5846, p 29 (January 22, 1981), and a subsequent letter opinion addressed to you dated February 22, 1982, concluded that the manifest intent of the United States Congress and the Michigan Legislature was to ensure that sex be irrelevant in establishing sexually neutral actuarially equivalent pension benefits. However, there is no similar mandate relating to age.

The employment of the concept of 'actuarial equivalent' was recognized in OAG, No 5846, supra, p 31:

'In King County Employees' Ass'n v State Employees' Retirement Board, 54 Wash 2d 1; 336 P2d 387, 391 (1959), the Washington Supreme Court considered a statute which defined the term 'actuarial equivalent' as any

". . . benefit of equal value when computed upon the basis of such mortality and other tables as may be adopted by the retirement board.' [Emphasis supplied]

'So defined, the Court held the term 'actuarial equivalent'

". . . clearly has reference to the mathematical calculations to be made relative to a member's accumulated contributions--calculations made in order to distribute those accumulated contributions on a monthly payment basis over the remainder of his or her life.'

'The reasoning of the Washington Supreme Court is helpful in determining the meaning of 'actuarially equivalent' in 1851 PA 156, Sec. 12a(1)(b), supra. 'Equivalent' may be interpreted as meaning a benefit of equal value based on accumulated contributions, as actuarially determined to be paid eligible early retirants under the statute.'

In determining whether the concept of 'actuarial equivalent' in section 51(1) of 1945 PA 135, supra, is compatible with the Elliott-Larsen Civil Rights Act, supra, it is essential to consider the terms 'bona fide' and 'subterfuge' as employed by the Legislature in 1976 PA 453, Sec. 202(2), supra. OAG, 1977-1978, No 5239, p 262, 263-264 (November 3, 1977), discussed, in the context of a mandatory retirement age, the use of these terms:

'Thus, age may be used as a criteria for retirement where there exists a 'bona fide retirement policy or system' and where the policy or system does not constitute 'subterfuge to evade the purposes' of the statute. The key question thus becomes what constitutes 'a bona fide policy or system' and what constitutes a 'subterfuge' to evade the purposes of the statute.

The Federal Age Discrimination in Employment Act contains language which is substantially identical to that which exists in the new Michigan Civil Rights Act. The Federal Courts have addressed the concepts of 'bona fides' and 'subterfuge.' These courts have inquired into such matters as the date of adoption of a particular retirement plan and have held that where the plan was adopted prior to the enactment of the federal legislation, that such plans were not adopted 'as a subterfuge to evade the purposes of the act.' 29 USC Sec. 623(f)(2). Kincaid v Steel Workers of America (DC Ind, 1972). Steiner v National League of Professional Baseball Clubs, 377 F Supp 945 (DC Cal, 1974); Brennan v Taft Broadcasting Co, 500 F2d 212 (CA 5, 1974); Hodgson v American Hardware Mutual Insurance Co, 329 F Supp 225 (DC Minn, 1971). The Wisconsin Supreme Court in interpreting a parallel state statute looked to the amount of benefits paid to a retiree and the relative likelihood of continued payment as a criteria relating to the 'bona fides' of the plan and whether or not it was operating as a subterfuge to evade the purposes of the Act. Walker Manufacturing Co v Industrial Comm, 27 Wis 2d 669; 135 NW2d 307 (1965). See Also Zinger v Blanchette, 549 F2d 901 (CA 3, 1977).'

Through the use of the term 'actuarial equivalent,' the Legislature has indicated that an individual selecting a retirement option, thereby obtaining additional benefits for a beneficiary not otherwise provided under the straight-life retirement, shall receive a benefit of equal value. The computation of such benefit shall be based upon mortality (age) and other sexually neutral tables adopted by the retirement board which are compatible with 1945 PA 135, supra. The utilization of such mortality tables in computing the actuarial equivalent is a long recognized and accepted practice within the insurance industry and is consistent with the concepts of 'bona fide' and 'subterfuge' as employed in the Elliott-Larsen Civil Rights Act, supra.

It is my opinion, therefore, that section 51(1) of 1945 PA 135, supra, in providing that the value of each optional form of retirement allowance shall be the actuarial equivalent of the member's straight-life retirement allowance, is consistent with the policy established by the Legislature under the Elliott-Larsen Civil Rights Act, supra.

Frank J. Kelley

Attorney General

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