The inadequacy of TRS and what to do about it?
Teachers Pension Inadequacy
A defined benefit pension plan, such as TRS, provides a small group of long-serving teachers with good benefits while leaving short and medium-term teachers behind.1 TRS carries no investment risk if the teacher continues until retirement. The teacher is guaranteed a stream of income for the rest of their life with the option of a survivor's benefit. Prior research has found pension plan benefit formulas disproportionately reward very long-term employees at the expense of short- and medium-term workers.2
Many teachers will leave the profession without accumulating adequate retirement savings for their teaching service years due to high turnover rates. Most research indicates that alternative plans outperform the typical defined benefit plan offered to teachers today to provide the largest possible share of workers with adequate retirement savings.1
Target Savings Rate
Research shows that a reasonable target savings rate is around 10-15 percent of your salary to help workers establish specific annual savings targets, and they can help workers understand over the long term whether they’re on track to a secure retirement or not.1
The typical teacher pension plan offers very little retirement savings in the first 20 years of a teacher’s career; after that, pension wealth spikes at 33 years of experience. This plan provides generous retirement for full-career workers, but it does so at the expense of short- and medium-term workers. For example, a teacher hired at age 25 who completes 40 years of service typically collects lifetime pension benefits nearly seven times as much as the teacher who spends only 20 years in the plan.
Many teachers employed for much more than five years accumulate few benefits. Teachers hired at age 25 must work between 17 and 27 years to accrue a pension worth more than their contributions. Those who leave before reaching that milestone gain little financially by participating in the plan. Teachers who complete 20 years of service amass only 15 percent of the lifetime pension benefits those with a 40-year career would accumulate.2
For short- and medium-term teachers, geographically mobile teachers, or career changers, being in a defined benefit plan brings a risk of inadequate savings. If the teacher moves across state lines or changes careers, she/he will have to either take his/her contributions with him/her or wait for a pension. Either way, this translates to inadequate savings by the time of retirement.
Teachers with inadequate retirement savings during their years of teaching, they’ll need to increase their savings rate later in their career, work longer, rely more on family or governmental support, or live a more modest lifestyle in retirement. The current state-run pension plans provide comfort and security for only a subset of teachers, but they do not do an excellent job covering everybody within the system.
Revising TRS to be a cash balance plan could significantly improve retirement security for Texas teachers who spend less than a full career in the pension system. The additional problem is that Social Security does not cover most Texas public school teachers. This is why teachers should save in a 401(k) type plan in their school district to reach the 15 percent of income savings goal.
What to do about it?
Because of research showing that TRS and other state-run teachers' pensions offer inadequate retirement savings, especially for shorter and medium tenured faculty, what should one do? One good option is to save more in a 401(k)-type plan to supplement the current system. A 401(k)-type plan, such as a 457 or 403(b), allows participants to defer income pre-tax and invest the money in various employer-sponsored retirement plans. For many teachers, this is a smart choice to boost their level of retirement savings. Talk to a financial planner to learn more about saving for retirement.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.