Important Study Finds TRS DB Plan is Best Model
The Teacher Retirement System of Texas (TRS) released two legislatively mandated studies on the pension fund’s plan design and the retiree healthcare program, TRS-Care. Both studies had a required completion date of September 1, 2012. You can read them in full on the TRS website by clicking here.
TRS began working on the studies at the end of the 82nd legislative session in 2011. The Texas Legislature directed TRS to conduct a study on the impacts of potential changes to its current defined benefit pension plan. Additionally, the legislature instructed TRS to address the solvency issues with the TRS-Care health insurance program by doing a separate study.
TRTA has participated in both studies by providing public testimony and relaying the concerns of our members to TRS.
While both studies are rather lengthy, TRTA will focus today on the key findings of each.
First of all, TRS is able to pay currently projected benefits through the year 2075 even without making changes to the system; however, the State and TRS need to begin addressing the $24 billion unfunded liability the system currently holds.
You may have read in previous issues of The VOICE or the Inside Line that TRS is at a funded ratio of 83%, a healthy benchmark for public retirement funds. However, Texas statute provides that in order to provide permanent cost-of-living increases to TRS annuitants the fund must have a funding period of less than 31-years. Currently the fund has a “never” funding period (meaning that based on current funding levels and expected investment returns, the plan will not return to solvency). As you are aware retirees have not received a permanent increase since 2001.
TRTA does want to restate how grateful we are to all members of the Texas Legislature and to all our TRTA members who worked hard to provide the supplemental payment in 2008. That benefit adjustment was the first and only supplemental payment of its kind in the 75-year history of TRS. It came at a time that retirees were very much in need and it did help hundreds of thousands of TRS members. TRTA believes another such supplemental payment may be needed as a stop-gap measure before a permanent increase may be possible. This is one issue we will be working on next session.
Another key finding from the report is that the value of the retirement benefit available for TRS members is 36% less than the average benefits available to members of other state teacher retirement systems. In other words, the average monthly annuity of $1867 for a TRS annuitant is considered modest among peer pension plans.
The third key finding from the study, and a very important facet to take note of, is that the defined benefit plan provides benefits at a lower cost than alternative plans. As you have read, there are groups in Texas that want to change TRS to a defined contribution plan, often citing cost savings as a reason to support the change. The study of the TRS system confirms that the current DB structure is the most cost efficient for the state and for taxpayers. In fact, changing TRS to a defined contribution plan (for new hires) would immediately add $12 billion to the plan’s unfunded liability. See “Reaction to Study” below for more information on this point.
The fourth finding is that the majority of TRS members would do a worse job of investing in their own plan with a defined contribution component. One of the greatest benefits of having a DB plan is the ability to pool assets and have the system itself assume the risk of investing while ensuring a monthly annuity for the members. With a defined contribution plan, that risk shifts onto the retiree, who may outlive their benefit. Think about the many people who planned to retire in September or October of 2008. Many people with a defined contribution plan were immediately unable to retire as the market losses eroded their hard-earned and invested retirement savings. The people in TRS also saw their plan’s value erode from $112 billion to a reported $67 billion in February of 2009. Today, the TRS pension trust fund has reclaimed those losses through professional investing and the ability to weather difficult economic times. Your TRS trust fund is again worth over $110 billion. In a mere 3-year period, TRS values dropped from $112 billion to $67 billion, and bounced back up to $110 billion. How many people can say they have regained their market losses so efficiently?
The fifth key finding is that alternative plan structures carry differing levels of risk for the state and for TRS members. In other words, DC plans shift risk away from the State, but are far riskier for the retiree. However, this shift does not solve the issue of the plan’s unfunded liability.
The sixth finding is that other state retirement systems that have changed their plan structures from DB plans to other types of plans have also had to lower benefits to see cost savings for their plans. In other words, changes to plan design are accompanied by drastic benefit cuts for future retirees. As has already been pointed out, the TRS Texas retirement plan is already 36% less rich than comparison plans. Cutting TRS benefits any further may severely impact a future retirement security for over 1 million active school employees.
Seventh, moving new hires to a DC plan or alternative plan does not eliminate existing liabilities. As mentioned previously, such a shift would actually increase those liabilities. Additionally, changing to a DC plan also removes a source of revenue from the fund which could no longer be used as a means to pay down the unfunded liability. The state or TRS would have to find some other revenue source to eliminate that debt.
Finally, 95% of public school TRS members do not pay into Social Security, meaning that the TRS benefit is their only form of retirement security. As we have discussed in previous articles, there is also the possibility that Texas school districts would have to begin paying into Social Security if new hires were put into a DC plan. This creates a new financial burden for school districts and their employees, as well.
TRTA has stated repeatedly over the past two years that the TRS pension trust fund is NOT in crisis. While modest changes to the system can be made to bring the fund closer to actuarial soundness, the structure of the system as a defined benefit is viable, efficient and a necessary component of our retirees’ financial security.
Healthcare Presents More Significant Funding Challenges
The TRS-Care study addresses a more immediate concern in funding. As you may recall, at the end of the last legislative session, the healthcare program was facing an imminent shortfall in 2014-2015. TRS was tasked with exploring options to sustain the insurance program for the long-term, including the possibility of plan design changes.
As a result of this study, you have already seen many changes, including the new TRS Medicare Advantage program for certain TRS members. TRS also re-bid its existing contract for a Pharmacy Benefit Manager and added a Medicare Part D plan as an option.
While these changes are projected to save TRS-Care millions of dollars, they are not enough to prevent a shortfall in the 2016-2017 biennium, according to the study. These plans are dependent upon high participation rates in the Medicare Advantage program, as well as the state restoring its contribution to the full 1% of teacher payroll.
The options available for extending the life of TRS-Care are changes to benefits and eligibility, changes to retiree premiums, or increasing revenue through contributions from the state, school district, active employee or from the federal government. The study took into account that non-Medicare eligible participants cost the plan more than Medicare eligible participants.
It is important to note that both studies were conducted as a means to provide objective solutions to long-term (the pension fund) or immediate (TRS-Care) funding concerns. TRS will at no time make any recommendations to the Texas Legislature as to what options should be pursued.
TRTA, on the other hand, will review both studies thoroughly and will be able to provide testimony to the legislature regarding what options are best for both the retirees and the system itself. Please take the time to read the full studies and review the possibilities. We would like to hear your feedback. Email TRTA at firstname.lastname@example.org to share your perspective about what is best for you.
Reaction to the Pension Study
TRTA believes the TRS pension study points out major benefits of the TRS defined benefit plan design and provides ample evidence suggesting that with some gradual revenue enhancement for the TRS trust fund and minor benefit tweaking, the pension plan will be able to serve its members for generations to come.
Several think-tank and other advocacy organizations were not as pleased with the outcome from the TRS pension study. In a report by Kate Alexander in the Austin American Statesman, a spokesman for one group, the Texas Public Policy Foundation (TPPF) suggests that a change must still be made. “It will get a good look. There is a high likelihood that changes will be made,” said Talmadge Heflin of the Texas Public Policy Foundation. (click here to read the full story)
Many of you know Mr. Heflin as a former Texas State Representative. He served Texas House District 149 from 1983-2005. During that time, Mr. Heflin made contributions to the Employees Retirement System of Texas and is now eligible to draw a defined benefit retirement from the ERS.
TRTA produced this response to Mr. Heflin’s and the TPPF comment in the Statesman’s story:
“The Best Option is Maintain the Plan
Public education retirees around the state appreciate the fact that the Teacher Retirement System of Texas (TRS) pension design study accurately points out that switching to a defined contribution plan for new TRS members would cost the Texas taxpayers billions of dollars, while significantly reducing benefits for future teachers. The study was well-researched, factually presented, and supports the reality that the TRS defined benefit plan is an effective, low-cost/ high-value retirement plan.
Talmadge Heflin, Director of the Center for Fiscal Policy for the Texas Public Policy Foundation (TPPF), has supported the elimination of the TRS defined benefit plan by forcing public education employees into a defined contribution or 401(k)-style plan. In yesterday’s article, Heflin is quoted as saying that “lawmakers must ensure that the state’s retirement offering is a combination of the best buy for the employee and for the taxpayer.”
TRTA believes that the TRS study shows the current TRS defined benefit plan is a combination of the best buy for employees and for the taxpayers. TRS is well-funded, has never been subject to a member or legislative funding “holiday,” has a strong record of high investment returns, operates at a low cost, provides a great value to its members, pumps over $7 billion into the state economy every year, and is a great value for all Texans.
Surely TPPF would agree that there is no room for wasteful government mismanagement. The study indicates that “closing” the plan would do nothing to help Texas educators or taxpayers. In fact, it explodes the TRS unfunded liability by adding another $11.7 billion!
It is our hope that TPPF will not continue to push for a defined contribution plan that is inefficient, wastes billions of taxpayer dollars, and endangers the retirement security of current and future educators.
TRTA will continue to work with the Texas Legislature to strengthen the existing TRS defined benefit plan.
Texas Retired Teachers Association
The Texas Retired Teachers Association is the largest organization of public education retirees in Texas and in the country. With over 73,000 members, TRTA is actively involved in legislative efforts to protect public education retirees, their retirement benefits, and their health care program.”
Still others recognized the report for what it is…a review of the TRS benefit plan design and how various changes may impact the system.
Mr. Forrest Wilder of the Texas Observer also reported on this issue. His full report can be found by clicking here. Mr. Wilder captures the essence of this situation by reflecting on those who opposed the TRS defined benefit plan and states, “If it ain’t broke don’t fix it, right? Well, it seems that breaking it is the point.”
TRTA concurs that the attacks on the Texas TRS defined benefit plan is a manufactured crisis, a “solution” in search of a problem. Be ready TRTA members and education supporters, the opposition to your retirement plan is working hard to attack in the coming session and we will all need to work hard to defend your TRS defined benefit plan.
As always, thank you for being a member of TRTA. If you are not a member and want to join, please call us at 1.800.880.1650.