The Teacher Retirement System released a studyAug. 31, 2012, that clearly shows any changes to the structure of the TRS pension fund (such as moving to a defined contribution plan or a hybrid*) would NOT save the state money. Other states’ experiences demonstrate that any savings to state governments usually comes as a result of lowering benefits, not changing the structures of their funds – and in fact, a structural change can cost the state more in the near term.

*TRS is a defined benefit plan, meaning that a certain level of benefits is guaranteed at retirement. A defined contribution plan is similar to a 401(k) plan, in which the level of contributions is guaranteed, but not the benefits. A hybrid combines elements of both; for example, such a plan might offer a much smaller guaranteed benefit in addition to a 401(k) benefit.

The TRS study also compares the benefits received by TRS retirees to those of other states and other systems, and finds that Texas educators’ retirement benefits are very modest, in large part due to the lack of automatic cost-of-living adjustments and the lack of participation in Social Security. However, legislators still may consider lowering benefits this session to address funding liabilities caused by extended investment losses due to global economic issues.

The TRS study was a requirement resulting from a bill the Texas Legislature passed during the 2011 legislative session; TRS also studied the sustainability of TRS-Care (retiree health insurance), while the state Employees Retirement System also was required to examine its pension and health insurance plans.

Highlights of the 2012 TRS pension plan study

  • Though TRS is in good financial health compared to most similar funds, the ongoing problems with the economy have created large unfunded liabilities that will need to be addressed.
  • The only reliable way to improve the condition of the fund is through reductions in benefits, increases in contributions, or a combination of the two.
  • TRS benefits are already modest, and were reduced as recently as 2005.
  • The current structure of the plan provides a better benefit than any of the alternatives, such as a 401(k) structure or a hybrid plan; structural changes alone will not save the state any money.
  • Other states that have moved to a defined benefit or hybrid plan have achieved savings by lowering benefits as well.
  • Because 95 percent of public school employees do not participate in Social Security, TRS is their only source of a lifetime benefit.
  • In addition to structural changes, TRS studied the extent to which other revisions would improve the fiscal condition of the fund. Options examined included:
  1. lowering the multiplier from 2.3 to 2.0 percent (for future years)
  2. using the average of the employee’s seven highest years of salary instead of five
  3. changing retirement eligibility to require a minimum age of 62 for full benefits
  4. increasing the member contribution rate from the current 6.4 to 7.4 percent

The greatest impact would be made by the change in retirement eligibility.

Highlights of the 2012 TRS-Care (retiree health insurance) study

  • TRS-Care will be insolvent in the short term unless the Legislature takes action soon.
  • Recent Medicare initiatives may help extend the life of the fund through 2015, but that time frame is dependent on how many retirees choose to participate in the new programs.
  • Retirees under age 65 (those not yet eligible for Medicare) are by far the costliest members to cover.
  • Options for addressing the funding shortfall include:
    1. Increasing funding from contributors (which include the state, retirees, active employees and school districts)
    2. Requiring retirees to pay the full cost of optional coverage (the levels of coverage beyond the basic catastrophic plan)
    3. Revising coverage for non-Medicare eligible retirees (such as allowing TRS-Care 1 only, providing funds to shop for coverage in the private market, or placing them in TRS-ActiveCare)
    4. Requiring Medicare-eligible retirees to purchase Medicare Part B
    5. Tightening eligibility requirements (for example, imposing a minimum age)

See the executive summaries and full reports of the TRS study for more detail and valuable discussion points.

Upcoming TCTA testimony on TRS issues

TCTA is scheduled to testify before the House Committee on Pensions, Investments and Financial Services Sept.12, 2012. TCTA will strongly support retaining the current structure of TRS, defend current levels of benefits, and encourage lawmakers to develop a long-term workable solution to ensure the ongoing solvency of TRS-Care.