Treasurer David Lillard says the $37 billion pension fund has an unfunded liability of $1.8 billion. Photo credit Blake Farmer/WPLN

A new retirement system being contemplated by the Tennessee legislature would require new state employees and school teachers to potentially work more years. And their guaranteed money would be cut by roughly a third.

State Treasurer David Lillard says change is necessary because any new hires are adding to the state pension’s unfunded deficit. His plan would move to what’s known as a hybrid pension system, which has been adopted in states like Georgia and Virginia. It shifts more of the responsibility of saving for retirement to individuals in an effort to decrease the state’s exposure to volatility in the stock market.

However, the new retirement plan would include some guaranteed money, which Lillard says is important.

“We do believe that in order to get an employee a much better opportunity to have a truly sufficient benefit, you need a floor, basically.”

Lillard’s pension changes raise the retirement age by five years and make all state workers contribute 5 percent of their income into the program. Currently, only public school teachers have been required to pay in to get their retirement benefits.

If approved by the legislature, the changes would apply to state employees, teachers and higher education officials hired after July 1, 2014.

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Currently retirement eligibility comes after 30 years of service or age 60. The hybrid plan for new state workers and public school teachers raises the age to 65 or the “rule of 90,” which is when age plus years of service equals 90.

It’s a complicated equation but present benefits equal 1.5 percent of salary accrued per year. The hybrid plan reduces that to 1 percent.

New plan also caps benefits at $80,000 per year. And it gives the state a way to control expenditures if investment returns miss projections.

The state could now freeze, suspend or modify benefits, which has been a concern of the Tennessee State Employees Association.