SDCERS Retirement Decisions: Options, DROP, COLA, Buyback (2026)

Updated October 7, 2026. Quick answer: San Diego City Employees’ Retirement System (SDCERS) members pick a retirement benefit option before they retire or enter DROP: Maximum Benefit, Option 1, or Options 2 to 4, which reduce the pension to guarantee a 100%, 50% or chosen percentage continuance to a named person. The designation cannot be changed after retirement or DROP entry. DROP runs up to five years and is open to City members hired before July 1, 2005. A refund of contributions forfeits any pension. The COLA is capped at 2.0%. Eligibility and formulas differ by plan tier.

What this page covers and which members it fits

This page works from SDCERS fact sheets and plan summaries on benefit options, DROP, service credit purchase, termination, and the City plan tiers. SDCERS serves the City of San Diego, the San Diego Unified Port District and the San Diego County Regional Airport Authority, and its rules differ by sponsor and hire date. SDCERS says: “You are only eligible for the pension benefits applicable to your plan tier that are in place as of your termination date with the City.” Each figure below is therefore tied to the group the source names, and no figure is stated for all members unless the source does. For the state tax side, see California retirement taxes and does California tax pensions.

The benefit option election: what each option pays a survivor

“Before you can retire or enter DROP, you must select a retirement benefit option, which determines the amount of your monthly pension benefit and what kind of death benefit you can leave to a beneficiary.” The table sets out each option as the Retirement Benefit Options fact sheet describes it.

The table carries no reduction percentages because the pages read publish none. For Option 2, SDCERS states “The amount the retiree’s benefit is reduced depends on the age difference between the retiree and their continuance beneficiary”, and “the greater the age gap, the greater the reduction”. For the general trade, see single-life versus joint-and-survivor pension.

Maximum Benefit: married, single, and the marriage-date rule

The surviving spouse’s 50% is conditional: “if the Member retired or entered DROP before 1995 or after September 18, 2008, the surviving spouse named to receive this continuance benefit must have been married to the retiree on the date of their retirement and on the date of the retiree’s death”. The fact sheet adds that “the 50% continuance benefit will be forfeited if your continuance beneficiary predeceases you. In neither case will your pension benefit be recalculated.”

The single version is only for unmarried members, and SDCERS warns: “If you select this benefit option and you are married or in a domestic partnership, you may be required to pay back a portion of your pension benefits and/or have your monthly pension benefit reduced.”

Option 1 and Options 2 to 4

Option 1: “Provides an actuarially reduced lifetime monthly pension benefit to the retiree. Upon death of the retiree, the remaining balance (if any) of the Member’s employee contributions and interest will be paid to their designated beneficiary or estate in one lump sum payment or as a short-term annuity. Does not provide a continuance benefit.” On who can be named under Options 2 to 4, SDCERS says “it does have to be a person (e.g., cannot be a trust or estate) and the Member can only name one continuance beneficiary”.

A computed example from an assumed $3,000 reduced monthly pension, not an SDCERS figure: under Option 2 the survivor’s share is 100% of $3,000, a computed $3,000 a month; under Option 3 it is 50%, a computed $1,500 a month; under an Option 4 election of an assumed 75% it is a computed $2,250 a month.

What cannot be changed, and the federal limit on non-spouse beneficiaries

The election is firm. SDCERS says: “The continuance beneficiary designation cannot be changed after the Member enters DROP or retires. If the continuance beneficiary predeceases the retiree, then the retiree’s pension benefit ends upon the retiree’s death.”

For a beneficiary who is not the spouse, SDCERS says: “Federal tax law may limit the percentage of your benefit you may leave as a continuance to a non-spouse depending on the age difference and your age at retirement.” The limit turns on an adjusted age difference: the gap in birth years, less (if the member is under 70 at retirement or DROP exit) the difference between 70 and the member’s age that year. In SDCERS’s example, a member born in 1960 names a child born in 1985 and turns 57 in the retirement year, so the adjusted difference is 25 minus 13, or 12, and “the maximum continuance benefit the member can leave to their child is 93%”.

A computed example from assumed birth years, not an SDCERS figure: a member born in 1965 retiring at age 60 who names a beneficiary born in 1990 has a gap of 1990 minus 1965, or 25, less 70 minus 60, or 10, so the adjusted difference is a computed 15. SDCERS’s chart lists a maximum of 84% for an adjusted difference of 15, so a 100% Option 2 continuance would exceed that limit.

DROP: who can enter, and what the election locks in

SDCERS describes DROP this way: “DROP is a voluntary program that allows you to continue working for your plan sponsor for up to five years while simultaneously earning a monthly pension benefit.” City entry is open to a member “hired before July 1, 2005”. The page also lists a Port “Member hired before October 1, 2005” and an Airport “Member hired on or before October 2, 2006”.

The commitment is large. “Once you enter DROP, you may not change your decision to enter the program, nor your agreement to leave employment and retire within five years.” The entry checklist adds: “I have 14 days prior to my DROP entry date to change my mind about entering DROP and inform SDCERS”, and “my DROP application and elections are irrevocable”. The pension is frozen: “your pension benefit amount is fixed when you enter DROP (not including future cost of living adjustments), which means you will not continue earning service credit or be eligible for any changes to your benefit formula between entering and leaving DROP”.

What goes into the DROP account, and what it earns

While in DROP, the pension is paid into the DROP account. SDCERS says: “you will contribute 3.05% of your pensionable salary to your DROP account every pay period”. “As of January 1, 2026, the quarterly compounded interest rate for DROP participation accounts is 4.2%”. On timing, “you must be actively working for your plan sponsor and participating in DROP on the last day of a quarter in order for your DROP account to receive interest for that quarter”.

A computed example from assumed figures, not SDCERS figures: a pension of $4,000 a month deposited for all 60 months is 4,000 times 60, a computed $240,000 of pension deposits before any interest, COLA, or contributions. The real balance depends on each year’s rate and on COLAs, and the page gives no worked balance.

Leaving DROP: lump sum, partial lump sum, or annuity

SDCERS says: “Upon exiting DROP, Members may take a lump sum distribution of their entire DROP account, take a partial lump sum and annuitize the remaining balance, or annuitize the entire amount and begin receiving equal monthly payments annuitized over either their life expectancy (according to the uniform life expectancy table) or 240 months (not to exceed the Member’s life expectancy).” On a lump sum, SDCERS says: “If you take a lump sum distribution, SDCERS will be required to withhold 20% federal income taxes and 2% for California residents.” On a rollover to a qualified plan, “SDCERS will not withhold any taxes”. See 20 percent withholding on a pension lump sum for how federal withholding works in general.

A computed example from an assumed $240,000 DROP balance taken entirely as a lump sum and not rolled over, not an SDCERS figure: 20% federal withholding is a computed $48,000 and 2% California withholding is a computed $4,800. Withholding is an advance, not the final tax, and SDCERS directs members to a tax professional.

The plan tiers that shape these decisions

Port and Airport members have their own summaries, which this page did not read, and vesting differs: “General and Safety Members are vested with five years of service credit” for Port members and “General Members are vested with five years of service credit” for Airport members. Confirm your own tier.

Refund of contributions versus leaving them with SDCERS

A member who leaves before retiring can leave the contributions on account, leave them to establish reciprocity, or take a refund. For City members, the plan summaries read for every City tier in the table give the same vesting rule: “You must have at least 10 full years of service credit to be vested in the retirement system and eligible for retirement benefits once you have met the minimum age requirement.” For a vested member, “As a vested Member, you have earned the right to retire and begin receiving your lifetime monthly pension benefit once you become age-eligible. To do so, you must leave your contributions on account with SDCERS when you terminate employment.” Nothing starts automatically: “You must proactively file an application for retirement in order to begin receiving payments.”

On interest, SDCERS says: “Your contributions will continue earning annual compounded interest at the discount rate (currently 6.5%), applied each June 30th, only if the funds are still on deposit with SDCERS on June 30th. If you take a refund at any time before June 30th of a given year, no interest will be added. Annual interest is not prorated.”

SDCERS names three key rules on refunds. “If you take a refund of your contributions, you have forfeited the right to receive any pension benefit, including a disability retirement benefit, if you subsequently become eligible for those benefits”. “If you take a refund, you cannot establish reciprocity”. “The only way to re-establish your service credit is to re-enter service with your prior employer (City and Airport only) and redeposit your previously refunded contributions, plus interest. However, this option is not available for Port Members.” For the general decision, see pension refund versus leaving it.

Reciprocity is the route for a member moving to another public system. “To establish reciprocity, you must leave your contributions on account with SDCERS, terminate employment with the City, Port, or Airport, begin employment with an employer in a reciprocal system within 6 months of terminating, and then become a member of that reciprocal system.” Withdrawing contributions also breaks reciprocity, per the refund rules above.

On a lump sum refund, SDCERS says: “SDCERS is required to withhold 20% of the taxable portion for federal income taxes and 2% for California residents”. See California retirement taxes for the state side.

A member who returns after a refund has a narrow route. For City and Airport service, SDCERS says “you may repay those contributions in a lump sum, plus interest at the actuarial interest rate”. For the Port, “Port Members do not have the option of repaying their contributions after they have withdrawn them, even if they subsequently return to Port employment”.

Buying service credit

SDCERS says that “the more service credit you have accrued as of your retirement or DROP entry date, the greater your monthly pension benefit will be”. Timing is the first constraint: “all PSCs must be completed before you terminate employment, retire, or enter DROP”. After the contract is mailed, “you have 60 days to sign and return the contract, and then 60 days after signing the contract to either remit payment in full or begin the agreed-upon installment payments”. The general question is covered at pension buyback calculator.

The kinds of service that can be bought differ by sponsor. City members have a special route: “City Members who were hired before July 2, 2005 may also purchase up to five years of additional service credit”. On price, “Most PSC contracts are based on your age, years of service, and highest average pensionable compensation at the time the PSC request is submitted.” The page gives no price schedule.

Cost-of-living adjustments, the COLA Bank and the COL Annuity

SDCERS describes the annual COLA this way: “Each July 1st, SDCERS retirees and active DROP participants will receive a COLA increase or decrease based on the CPI, up to a maximum of 2.0%.”

When inflation exceeds the cap, the excess is banked: “A retiree’s COLA Bank accumulates based on their fiscal year of retirement or DROP entry, and each annual retiree group has its own COLA Bank.” In a low-inflation year, “if the published COLA is less than 2%, some retirees may still receive the maximum 2% increase if they have enough accumulated in their COLA Bank to make up the difference”. The pages read do not state the balance of any COLA Bank.

The COL Annuity is separate and tied to the tier. “The COL Annuity is a one-time increase in a Member’s pension benefit amount, calculated as of their service retirement or DROP entry date.”

What the IRS adds on tax

A refund or lump sum from a public pension is a distribution, so the IRS rules apply on top of SDCERS’s own. On withholding, the IRS says that a taxable eligible rollover distribution paid to you “is subject to mandatory income tax withholding (generally at a rate of 20%), even if you intend to roll it over later”, and that if you roll it over yourself “you’ll have to add funds from other sources equal to the amount withheld”. SDCERS says it withholds on a lump sum and does not withhold on a rollover to a qualified plan, as described above. The rollover clock, if the money is paid to you: “you have 60 days from the date you receive it to roll it over to another eligible retirement plan”.

On early distributions the IRS says “the law imposes a 10% additional tax on certain early distributions from certain retirement plans”. Its list of exceptions includes “Distributions made to you after you separated from service with your employer after attainment of age 55” and “Distributions made to a qualified public safety employee from a governmental plan” if the employee separated from service during or after the year they attained age 50 or 25 years of service under the plan, whichever is earlier. Whether an exception fits a particular refund depends on your own plan and facts, so confirm it with a tax preparer before you take one.

What this page could not settle

• The pages read do not state the percentage by which any option reduces the pension, because it depends on the age gap.
• The pages read do not state whether a member can change from one option to another after retirement; they state that the continuance beneficiary designation cannot be changed.
• The pages read do not state a worked DROP balance, which depends on yearly interest rates and COLAs.
• The pages read do not state the cost of any service credit purchase; SDCERS calculates it on request.
• The pages read do not state the balance of any COLA Bank.
• Port and Airport plan summaries were not read, so tier details for those sponsors are not stated beyond vesting and DROP hire dates.
• The pages read give no benefit amount for any particular member; a member statement from SDCERS does. For a neighboring system, see LACERS retirement decisions.

Common mistakes

• Naming a continuance beneficiary under Options 2 to 4 and assuming it can be changed later; the designation cannot be changed after the member enters DROP or retires.
• Choosing Maximum Benefit (Single) while married or in a domestic partnership; SDCERS says the member may have to pay back part of the pension or have it reduced.
• Taking a refund and assuming a pension can still be claimed later; SDCERS says a refund forfeits any pension benefit and breaks reciprocity.
• Applying one tier’s figures to another; vesting, eligibility, final compensation and the Cost of Living Annuity differ by tier.

Related on this site: California retirement taxes, does California tax pensions, single-life versus joint-and-survivor pension, pension refund versus leaving it, pension buyback calculator, LACERS retirement decisions and public pension retirement decisions by system.

Sources

• SDCERS, Retirement benefit options: https://www.sdcers.gov/resources/learn_about/retirement-benefit-option
• SDCERS, Deferred Retirement Option Program (DROP): https://www.sdcers.gov/resources/learn_about/drop
• SDCERS, Purchase of service credit: https://www.sdcers.gov/resources/learn_about/purchase-of-service-credit
• SDCERS, Frequently asked questions: https://www.sdcers.gov/resources/faqs
• SDCERS, Plan summary: City general members hired on or after July 1, 2009: https://www.sdcers.gov/plan_summaries/city-general-members-hired-on-or-after-july-1-2009
• SDCERS, Plan summary: City general members hired July 1, 2002 to June 30, 2009: https://www.sdcers.gov/plan_summaries/city-general-members-hired-on-or-after-july-1-2002-but-before-july-1-2009
• SDCERS, Plan summary: City general members hired before July 1, 2002: https://www.sdcers.gov/plan_summaries/city-general-members-hired-before-july-1-2002
• SDCERS, Plan summary: City safety police members hired on or after August 1, 2012: https://www.sdcers.gov/plan_summaries/city-safety-police-members-hired-on-or-after-august-1-2012
• SDCERS, Plan summary: City safety fire members hired on or after January 1, 2012: https://www.sdcers.gov/plan_summaries/city-safety-fire-members-hired-on-or-after-january-1-2012
• SDCERS, DROP entry checklist for City employees: https://content.sdcers.gov/wp-content/uploads/2026/05/drop-entry-checklist_city-employees.pdf
• SDCERS, Explanation of IRS limitations on continuance benefit to a non-spouse: https://content.sdcers.org/wp-content/uploads/2024/12/explanation-of-irs-limitations-on-continuance-benefit-to-non-spouse_4.pdf
• SDCERS, Termination and deferred membership: https://www.sdcers.gov/resources/learn_about/termination-deferred-membership
• IRS, Topic no. 413, Rollovers from retirement plans (irs.gov): https://www.irs.gov/taxtopics/tc413
• IRS, Topic no. 558, Additional tax on early distributions from retirement plans other than IRAs (irs.gov): https://www.irs.gov/taxtopics/tc558

Sources: the primary documents linked above, read on October 7, 2026. General information from each system’s own published materials, not legal, tax or financial advice. Your own member statement and the system’s current rules decide your benefit, and a pension counsellor at the system or a fee-only adviser is the right place to confirm anything consequential.