You may already know that service credit (or time worked) is a key part of your CalPERS retirement benefit. What you may not realize is that a new law will change one of the ways service credit can be paid for beginning January 1, 2028.
Service credit is part of the calculation, along with your final pay and benefit formula, that determines your monthly pension check. In general, the more service credit you have, the higher your monthly pension may be. That’s why some members purchase eligible service credit to potentially increase their retirement benefit.
What is changing?
Beginning January 1, 2028, the Actuarial Equivalent Reduction (AER) payment option will no longer be available for new service credit purchases. That means members who purchase service credit on or after that date will need to pay the full amount before retiring.
For purchases made on or before December 31, 2027, AER may still be an available option if you’re eligible under the rules in place at the time of your purchase.
What is an AER?
AER allows you to pay for any service credit purchase balance at retirement through a permanent reduction to your monthly pension. It’s important to understand that AER does not lower the total cost of the service credit purchase — it simply changes how the remaining balance is paid.
Are there other payment options besides an AER?
If you’re eligible to purchase service credit, the cost and election information will be available in the Service Credit Purchase section of your myCalPERS account. You can pay it off at once (lump sum), pay in installments deducted from your paycheck, or even roll over funds from a qualified retirement account such as a 401(k) or 457(b).
It is required that your service credit purchase be paid in full before you retire.
Why does timing matter?
Purchasing service credit takes time. In many cases, your request may require employer review and certification before a cost estimate or election can be completed.
If you want the option to elect AER, you should begin the process approximately four to six months before December 31, 2027, as your election must be received by CalPERS prior to January 1, 2028. Starting early gives you more time to complete the purchase under the current rules.
Does this impact state Second Tier members?
Yes, this change will affect state Second Tier conversion purchases. Understanding your retirement formula is important because it determines how your benefit is calculated. You are a state Second Tier member if your formula is:
- 1.25% @ 65 (Classic)
- 1.25% @ 67 (PEPRA)
You can view your retirement formula in myCalPERS on the homepage in the retirement blue box labeled Your Retirement Formula.
If you’re eligible for a tier conversion purchase, you may have options that include future service conversion or past and future conversion. Because the timeline matters, members considering these purchases should review their options as early as possible, since AER will no longer be a payment option
Tier conversions elected before January 1, 2028, allow actively employed members to automatically elect AER as a payment option. After January 1, 2028, members will be expected to immediately pay in full or elect a payment installment plan.
You can refer to the state Second Tier to First Tier Conversion section in A Guide to Your CalPERS Service Credit Purchase Options (PUB. 12), for detailed information.
What should I do now?
Act early! If you’re thinking about purchasing service credit, the best first step is to log in to myCalPERS and review your options. You can also estimate the cost, learn which purchase types you may be eligible for, and decide whether acting now makes sense for your situation.