Intelligent Retirement Options for Texas Teachers
Texas teachers need help to recognize them for their important public service. The Teachers Retirement System (TRS) of Texas is the dominant retirement plan for teachers. But as I point out, this plan has several issues that have not been addressed. Our beloved teachers need to look at other intelligent options to supplement TRS.
TRS operates one of the largest pension plans in the country, serving almost 1.5 million workers and retirees. TRS faces an increasingly difficult funding environment that is complicated by uncertain investment returns and rapidly rising payouts, and its financial outlook has recently deteriorated.[i]
TRS reports that Texas’ past and present teachers have earned retirement benefits worth approximately $200 billion, but the retirement system has only about $154 billion on hand to pay for those benefits. That means TRS is at least $46 billion short of what should be in the fund today.[ii]
To bolster the plan’s finances, Texas Governor Greg Abbott signed legislation in spring 2019 that gradually raises total contributions by the state, school districts and plan members by 2.5 percentage points of salary over the next five years. However, this action may be insufficient to eliminate the plan’s funding gap.[iii]
In a recent analysis of TRS, the Urban Institute showed that TRS offers adequate benefits to long-term teachers, but relatively meager benefits to shorter-term teachers. For example, a teacher hired at age 25 who completes 40 years of service typically collects lifetime pension benefits that are nearly seven times as much as the benefits collected by a teacher who spends only 20 years in the plan.[iv] The data is clear in that TRS's pension plan is in trouble. If not addressed, future retirees face the possibility of paying higher taxes, receiving fewer services, seeing reduced benefits, or some combination of the three.[v]
Even more troubling for teachers is that the vast majority of Texas school districts do not participate in Social Security. Texas is in the minority of states that only pay into a pension fund and does not pay into Social Security for the majority of its teachers — which means most Texas teachers won't even have access to Social Security benefits when they retire.[vi]
Teachers are entitled to Social Security benefits only if they paid into that system through other employment (for at least 40 quarters) or their spouses. However, the federal windfall elimination law reduces, or in some cases eliminates, the amount of Social Security benefits received in those situations.
Teachers should be advised to augment their retirement savings by making personal investments in retirement options such as 403(b) or IRA plans. But many teachers do not take advantage of these tax-deferred defined contribution plans, or they don’t put in enough money to live a comfortable retirement.
Defined contribution plans require the employee, the employer, or both parties to make contributions to an individual account, like a 403(b). At the time of distribution, the amount in the account is made up of contributions and investment gains or losses. With defined contribution plans you have more control of your retirement and are not reliant upon the legislators in Austin.
The bottom line is that hard-working Texas teachers deserve better! You should not depend upon TRS to fully fund their retirement. This is especially the case if your school district does not pay into Social Security and you do not get this retirement income. Exasperating the problem is that TRS strongly favors long-tenured teachers, which is unfair to those career changers. Exploring defined contribution plans such as 403(b) and IRAs are intelligent options that should be put into the mix.