Why Texas Needs to Fix the Teacher Retirement System Before It Is Too Late
The Teacher Retirement System (TRS) of Texas was created to provide retirement benefits to educators and their families as a form of deferred compensation for their service to the state and its children. However, since 2003, contributions authorized by the legislature have not been enough to fully pre-fund future promised retirement benefits. As a result, there is at least a $46 billion shortfall in the dollars TRS should have on hand today to earn investment returns and be available to pay out earned monthly pension benefits promised to the 420,000 retired teachers, educational staff, and their dependents that rely on retirement security.
It would be a huge missed opportunity to end this legislative session without adopting a serious plan to get TRS on a path to fiscal sustainability.
Defining The Problem
1. The retirement security of TRS members — both current retirees and active employees in the education workforce — is being put at risk by not appropriately contributing to the system.
- The existing $46.2 billion shortfall is money that should be in the TRS trust fund today, earning investment returns, so that there is enough available to pay promised monthly retirement incomes without requiring higher contributions from taxpayers in the future.
- Most teachers in Texas do not have access to Social Security, and many retired teachers rely on TRS as their primary source of retirement savings.
- Further, for some TRS retirees, the lack of a cost-of-living-adjustment (COLA) on their pension has significantly eroded its value, making it hard to manage growing healthcare costs. Until the funded status of TRS improves, retired Texas teachers have little hope they will ever see a meaningful COLA.
2. The estimated pension debt of TRS is equal to nearly all other state debt in Texas combined ($53 billion). It is fiscally imprudent to allow this debt to continue growing by not allocating appropriate contributions.
- Delaying appropriate action will mean more money than necessary in the future will be spent on interest payments as opposed to teacher salaries or funding for students.
- Contributions into TRS should be increased to prevent the accumulation of further unfunded liabilities and eliminate the existing pension debt over time so that it does not pose a long-term fiscal threat to Texas’s fiscal stability.
- Pension debt is a highly weighted factor that credit rating agencies use when they determine a credit rating. If Texas’s state credit rating were to be downgraded, it would cost the state far more in increased interest rates on bonds than the cost to shore up the TRS pension fund.
A fiscally sustainable, resilient, successful retirement system for teachers should not be a partisan issue. Doing the responsible thing and appropriately funding TRS is something that all members of the legislature can support.
How a Long-term Solution Should Start
While putting in place a plan to raise current contribution rates is the first step, it should not be the last one. There are several other policies influencing TRS solvency that could be improved.
1. TRS should move toward a system of actuarially determined contribution rates. At a minimum, the rates should follow the funding guidelines set forth by the Texas Pension Review Board, which include the following:
- Require that actuaries take into account a reasonable assumed investment return when calculating how much should be contributed into the retirement system each year.
- Eliminate the TRS shortfall over a period no longer than 25–30 years. In other words, any unfunded pension liabilities that exist today should be paid off no later than 2049.
2. The definition of actuarial soundness should be examined and potentially updated.
- The state currently defines actuarial soundness as a pension system being within 31 years of full, appropriate funding levels.
- There has been movement in the actuarial community to shorten that window to 25 or even 20 years. State policymakers should consider the pros and cons of tightening our state’s definition.
3. The policy for providing COLAs should be reviewed.
- The Texas Pension Review Board’s Best Practices Guide suggests that all pensions should include a built in COLA to protect annuitants against loss of purchasing power over time. The PRB specifies that the COLA should not exceed the rate of inflation and that it should be prefunded, not paid for on an ad-hoc basis.
This text is adapted from Equable Institute’s joint open letter to the Texas Legislature. To read the letter in full, visit PaytheBillTexas.org.
To learn more about the Teacher Retirement System of Texas and current pension benefits, please visit Equable.org/Texas.