TRS lays out potential retirement changes in study presentation

The Teacher Retirement System has embarked on a study required by the Texas Legislature that will present a number of options to change teacher retirement benefits. A rider in the 2011 budget bill required TRS to report on the impacts of potential changes to the pension plan, including “retirement eligibility, final average salary, benefit multiplier, and the creation of a hybrid plan that includes defined benefit and defined contribution features ...”

At the April 2012 TRS Board of Trustees meeting, TRS staff laid out the first group of options being considered for inclusion in the study. TRS staff is starting with an assumption that the target level of benefits at retirement, known as the “replacement ratio,” should be 69 to 70 percent of the salary that the employee was making at retirement.

This percentage is on the low end of the range recommended by retirement advisors, and correlates to the approximate level of benefits for an employee retiring with 30 years of service credit (30 years times the 2.3 percent multiplier results in 69 percent of the employee’s final average salary).

TRS staff noted that the scenarios presented at this meeting measured replacement income only at the time of retirement, but that the lack of post-retirement increases will lower effective purchasing power over time.

NOTE: The study will consider the impact to the pension fund of the following options under varying scenarios, including whether the changes would apply only to new hires or would be imposed on current employees.

Retirement eligibility

The comprehensive TRS legislation from 2005 modified the Rule of 80 for normal retirement (age plus years of service must total at least 80) for new employees, defined as those entering TRS on or after Sept. 1, 2007. These employees, while still eligible for retirement upon meeting the Rule of 80, must also be at least age 60 to receive full benefits.

The study would consider a change to this new provision to impose a minimum age of 62, rather than 60. The current average age at retirement is 61 years.

Final average salary

Under current law, with the exception of veteran employees who were “grandfathered” in the 2005 law, an employee’s retirement benefit is based on the average of her highest five years of salary.

The study would consider a change to seven years of highest average salary. This would be outside the norm, as three to five years is more commonly used by public pension plans.

Multiplier

Current law includes a 2.3 percent multiplier in the benefit calculation for all employees. The study will examine a reduction to a 2.0 percent multiplier.

A 2.0 percent multiplier is mid-range for pension plans in which employees are not also participating in Social Security, but TRS retirees do not benefit from a regular cost-of-living adjustment that is common in such plans in other states.

Hybrid plan

TRS is currently a defined benefit (DB) plan, under which benefits are determined in law and contributions from the state and members can be adjusted as needed to provide those benefits. (The Texas Constitution requires the state to contribute 6 to 10 percent of payroll, and employees must contribute at least 6 percent.)

The pension study will present information on a variety of options that include elements of both a DB plan and a defined contribution (DC) plan, in which the contribution level is guaranteed and benefits rely on how well investments perform.

One example given was a hybrid plan under which a portion of contributions — the amount necessary to fund a 1.5 percent multiplier — would serve as the DB plan, providing a moderate monthly benefit; contributions in excess of that amount would go into an additional 401(k)-style DC plan.

TCTA testimony continues

TCTA has testified repeatedly on the study, asking that TRS staff review the impact of such changes not only on the pension fund, but on current and future retirees (TRS responded that the study will include this information). TCTA staff noted that any negative changes to retirement benefits would be “adding insult to injury.”

We have included a question regarding potential changes to the TRS plan structure in our candidate survey; survey responses can be viewed at TexasTeachersVote.org.

TRS staff has noted that not all proposals mentioned in the April presentation would necessarily be included in the final study. It will be refined and fleshed out in the coming months (with more opportunities for review and comment at the June and July 2012 TRS Board meetings), and submitted to the Legislature by September.

TCTA will continue to monitor and provide input into the development of the study.