Texas’ Retirement System Should Work for Every Teacher.
Every day, Texas’ teachers are working hard to serve students and families. But at present, teachers’ voices are being left out of policy conversations that ultimately impact every educator—including decisions about teachers’ retirement benefits.
Despite making commitments to provide retirement security to thousands of teachers, the Teacher Retirement System of Texas is failing a majority of them. The system has a $51 billion shortfall—money that could be going into teachers’ salaries or into funding for students and schools that is instead going toward paying what’s owed for future retirement benefits.
Further, TRS is set up in a manner where only about 20 percent of Texas teachers will ever earn the full retirement benefit that has been promised and TRS knows this is true. In fact, the system counts on teachers who will never receive benefits paying into it.
Close to half of new hires will leave within five years, meaning they won’t qualify for any future benefit. Many more who do qualify will either pay more into the pension fund than they receive in benefits, or see their pension eroded over time by inflation and a lack of cost-of-living adjustments.
Texas Teachers for Retirement Solutions, a group of Texas teachers from across the state, has recognized the significant challenges confronting TRS and the risks they pose for teachers’ retirement security. We’ve also established a set of principles that should guide the benefit system, and outlined the existing problems of today’s TRS.
Among other changes that would benefit teachers’ retirement security, Texas Teachers for Retirement Solutions supports the following policy recommendations:
Offer new teachers multiple retirement options so that they can choose a plan that best meets their needs, financial goals and priorities, and future plans. Teachers come to the profession at different stages of life, with different personal and family backgrounds, and different expectations for their career as a teacher. Instead of recognizing and supporting this diversity, TRS provides a one-size-fits-all retirement plan for all teachers regardless of their personal circumstances.
Teachers should have the opportunity to choose between two or three primary retirement plans that offer a path to adequate retirement security, including an option that provides a type of retirement income guarantee, as well as an option that gives teachers agency in making decisions about investment options that may result in a larger retirement income.
No single retirement plan works best for everyone in other sectors; teachers should be treated no differently. While there are many quality approaches to offering retirement benefits, we propose the following framework for improving the benefit design of TRS.
Guarantee Option
Continue offering the TRS pension, but with cost-of-living adjusments built in.
All new teachers would have the option of a defined benefit pension using the same benefit formula that’s been offered to new teachers since 2014.
Offering inflation protection on pension benefits is likely to involve additional costs. It would be reasonable to ask educators to contribute slightly more during their working years to help cover these costs.
Even if the state of Texas does not want to offer other retirement plans, like the Agency or Blended options discussed below, offering educators the ability to choose to pay in advance for inflation protection should be considered a first step toward improving the status quo and reducing the fear that current teachers have that they will have to wage the same fight current retirees are for some kind of COLA.
Agency Option
Allow new educators who are comfortable taking on personal financial risk the option to enroll in a defined contribution plan.
This primary retirement benefit should follow best practices for defined contribution plans, including defaulting participants into a quality portfolio, providing target date funds, and not supporting individual stock trading.
The state should require that individuals selecting this option be made aware of the financial risks, and acknowledge that they are taking on personal control of their retirement finances. If the individual does not have access to Social Security, they should be required to acknowledge they understand this, too.
In order to ensure this plan provides retirement security, this plan should have total combined contributions from teachers and employers of at least 15% of salary (for those without access to Social Security).
This retirement plan design should not be the default option for Texas educators who lack the safety net of Social Security.
Blended Option
Allow new educators who want guarantees and a greater degree of portability to select a retirement plan that balances those goals in a blended solution. Options could be a guaranteed return plan (similar to the “cash balance” designs that are used by the Texas County & District Retirement System or Texas Municipal Retirement System), or a defined benefit/defined contribution hybrid plan.
What is important for any blended option is that it balances guarantee goals with portability goals of the employer contributions to educator retirees.
Allow current teachers the option to switch from their current retirement plan into one of these new options. If the options discussed in Recommendation 1 are made available to new teachers, current teachers who feel that their personal retirement security would be better served with one of those options should be allowed to switch from TRS into a new plan. Teachers exploring switching should be provided with clear and easily accessible information about the impact a switch could have on their retirement security both in the short- and long-term.Teachers should only be permitted to switch between plans once (assuming it is compliant with IRS restrictions), and clear information must be made available so that they fully understand all ramifications of their decision.
Reduce the current, overly optimistic assumption about future investment performance, and adopt a more realistic perspective on the future. All educators—current and retired—have suffered the consequences of Texas TRS failing to earn its long-term assumed rate of return, which is the percentage of earnings the system expects to make form its investments. Returns were well below the 8% assumption that was in place until the end of 2018, meaning more money must be put into the system through contributions from teachers’ salaries. Lowering the investment assumption to 7.25% was a good first step, but it didn’t go far enough to minimize the risk that TRS returns might continue underperforming that target.
Although lowering the expected rate of return will cost more in near-term contributions, it will likely reduce expenditures over the long run and provide better retirement security for Texas teachers who depend on the retirement system.
Provide teachers with comprehensive and understandable educational materials to make informed decisions about their retirement plans. Financial education is sorely lacking under TRS, and the majority of Texas teachers have limited understanding of their retirement benefits. TRS offers a dense handbook and online resources, but for the most part education consists of resources offered to teachers approaching retirement—leaving new teachers to rely on veteran educators to understand the system.
Educators need to have financial education prioritized within their on-going professional development that includes a more robust focus on exactly what TRS is, how the benefits work, what teachers must do to earn those benefits, and whether they’re eligible for Social Security. This is information that teachers should be coming from trusted and objective sources that understand the strengths and challenges of TRS and the benefits it provides, and not from salespeople for supplemental retirement plans.
There is critical training that needs to be provided as part of onboarding, and consistently revisited and reinforced throughout educators’ careers.
Allow new educators the ability to defer their enrollment in any retirement plan and have the employer contributions that would have been paid on their behalf put toward paying down student loans. New teachers opting into this voluntary program would have the same amount taken out of their checks that would otherwise go to TRS. Similarly, the district and state would apply money otherwise contributed to TRS on behalf of the teacher as a student loan payment. While participating in this program, educators would not be accumulating years of service toward TRS, so in effect they would be delaying their retirement planning.
If adopted, this program should likely have some age limit or maximum number of years for participation so individuals don’t delay retirement for too long.
For those who stay in the profession long enough, TRS works. But there are far too many educators being left behind who deserve a secure path toward retirement. We’ve devoted our careers to helping students, and we deserve a secure retirement.
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Texas Teachers for Retirement Solutions