What You Need to Know About TRS and Your Benefits.
There is a lack of equity in how retirement benefits are earned among Texas teachers. The current pension system works for the few educators who make it a full career, but leaves the majority behind. That doesn’t mean pensions are bad, it just means they don’t work for everyone.
Here’s what you need to know by the numbers:
18%
The percentage of teachers hired this year that will stay in the profession long enough to reach the TRS “normal retirement” age of 62 is expected to be about 18%.
This is an estimate from financial professionals hired by TRS itself. This means the pension system definitely can work for these individuals, but it doesn’t work for everyone.
2.
There have only been 2 cost-of-living adjustments to pension benefits provided to retired Texas educators since 2001.
This means many retirees have seen the value of their pensions eroded over time by inflation. The design of Texas TRS does not include an automatic inflation adjustment, or the ability for members to pay a bit more when working to ensure they’ll get inflation adjustments. Retired educators are dependent on the state legislature adequately funding TRS.
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45%
Roughly half of the teachers hired this year will leave within the next five years.
Specifically, TRS expects about 45% of new hires to leave before they get to five years of service, and 55% to leave before they hit 10 years. None of these individuals will have accumulated adequate savings toward their future retirement income because of the way the pension plan is designed.
570,000.
The number of city, county, and district employees in Texas who receive retirement benefits through a different kind of plan called a Guaranteed Return plan.
This kind of retirement plan creates individual accounts for each member, which receive contributions and investment returns. This is different from a private sector 401k because the retirement system itself manages all of the money and guarantees a minimum return on the investments, so that members don’t have to figure out how to manage their money and never are at risk of a stock market crash hurting their retirement income savings. Guaranteed Return plans don’t work for everyone, but they show there is another way to provide adequate retirement income security. Other options used across the country include “Hybrid” retirement plans that mix pensions and individual retirement accounts, and personal retirement accounts where money is invested in “Target Date Funds.”
Texas TRS has a precarious funding shortfall. The state legislature has taken steps to try and solve this, but if it doesn’t work then educators could find themselves in the future being a primary source of funds to pay down pension debt because of a clause in the state’s constitution.
Here’s what the state of TRS means for you:
$51 Billion.
The funding shortfall for Texas TRS as of the end of 2020 has grown to $50.6 billion.
This is pension debt owed to TRS by the state legislature to ensure there will be enough money in the future to pay all pension benefits promised to public school educators.
77%
Texas TRS currently anticipates it only has the money to pay 76.8% of promised benefits in the future.
This number is called the “funding ratio.” The state anticipates additional contributions and investment returns will improve the funding ratio over time. But the state has been saying that for years, and the funding ratio has actually gotten worse in the decade after the Great Recession. The primary reason is that income from investment returns has been lower than expected, but another major reason is that the state hasn’t always paid its annual required pension bill.
8.25%
Contribution rates from educators, the state, and school districts were increased during the last legislative session in order to try and pay down pension debt.
This was a good decision from a fiscal responsibility perspective. But it will mean more money coming out of the pockets of teachers between now and 2024. By then both the state and educators are expected to be paying into TRS 8.25% of teacher salary. If pension debt keeps growing, those contributions may have to increase.
10%
The Texas Constitution says that the state can not pay into TRS more than 10% of the amount of salaries that educators are paid. Sometimes this is called “10% of payroll.”
Essentially, there is a cap on how much money the state can pay into TRS, even if there is a large funding shortfall in the future. Once the state hits that cap, it may have to rely only on school districts and educators for additional money to pay pension debt.
50-50
The Texas TRS board of trustees expects it will be able to earn 7.25% on its money over the next few decades.
But their investment advisors have told them there is basically a 50-50 chance this will happen. Like a coin flip. If the state underperforms its expected investment return, that will mean more pension debt that has to be paid into the pension system. And that will mean higher contribution rates.