The Arizona State Retirement System (ASRS) provides retirement benefits as well as long-term disability benefits to more than 570,000 teachers, state workers, and other public employees. The backbone of the system is a defined-benefit plan for retirees, with benefit amounts determined by the employee’s length of service and average salary.
The average monthly payout currently stands at $1,690. Benefits are made possible by joint contributions from employers and workers, which both kick in 11.94% of gross salary as of 2019.
The agency also offers four different health insurance plans. Medicare-eligible retirees can select the UnitedHealthcare Group Medicare Advantage—an HMO-style plan—or the Senior Supplement plan. Those who are not able to receive Medicare have two additional options: the Choice Plan for in-state residents and the Choice Plus Plan for those who live outside Arizona.
The ASRS actually offers seven different annuity options from which the recipient can choose, depending on one’s needs. The most basic type is a “straight life annuity,” which offers the highest monthly benefit. The downside is that there’s no benefit for a surviving spouse or beneficiary upon the death of the annuitant.
Other options offer survivor benefits in exchange for a lower monthly benefit. For example, if you pass away before receiving 60 months of payments, the “5-year certain” annuity entitles your beneficiary to any remaining distributions over that period. There are also other term certain annuities, such as a “10-year certain” and “15-year certain.” Term certain annuities with longer terms generate lower periodic benefits but may generate a larger total payout over the life of the annuity.
The “joint and survivor” annuities, on the other hand, pay your beneficiary for their entire life should you pass away first. One plan pays a 50% benefit to the survivor, while others pay either a 66⅔% benefit or a 100% benefit. Because Arizona is a community property state, recipients who are married are required to list their spouse as their primary beneficiary.
Along with your monthly annuity payment, some employees are also eligible for a health insurance premium benefit that helps defray the cost of medical coverage. The premium benefit runs between $75 and $260 per month, depending on how long you’ve worked in the system and whether you or your dependent receives Medicare.
To find out how much you’re scheduled to receive upon retirement, current employees can log into their myASRS account, which you can access from the retirement system’s homepage. The portal even allows you to run different benefit numbers based on your annuity choices.
In most cases, any benefits you receive through the Arizona State Retirement System are considered taxable income by the IRS. However, there is one narrow exception. If you retired on or after July 1, 1986, but made contributions before July 1, 1986, any contributions made before July 1, 1986, were already taxed and are not subject to additional taxes.
Retirement system beneficiaries also have to report benefits on their Arizona state income taxes, if the amount exceeds $2,500 per year. However, that only applies to those living in-state. Beneficiaries who reside elsewhere do not have to pay Arizona taxes on their state pension income.
To avoid a big tax bill at the end of the year, you may elect to claim a certain number of allowances, which will result in money being withheld from your pension payment. Members can log in to myASRS at any time to change their withholding strategy. By default, the system will choose the “married with three allowances” status for any recipients who don’t complete a withholding form.
How Healthy Is the Retirement System?
The Arizona retirement system's 10-year rate of return was 10.4% at the end of its fiscal year on June 30, 2019. The plan's fund is valued at approximately $41.83 billion and is 72.3% funded. In other words, it only has about 72.3 cents worth of assets for every dollar of benefits it’s promised to pay.
According to a 2015 Pew Charitable Trusts analysis, the Arizona retirement system is roughly in the middle of the pack when compared to other states. The good news is that the funding percentage has gone up slightly over the past couple of years due to stronger investment gains.
In an effort to return to fully funded status, the retirement system has waived cost-of-living increases since 2005. It has also migrated some of its holdings toward new asset classes—including foreign stocks and non-traded fixed income instruments—that it hopes can boost returns in the coming years.
The Bottom Line
One of the attractive features of Arizona’s retirement system is that it provides various annuity options to fit your specific needs. If you have a dependent, make sure to select a payout method that offers a survivor benefit.