Pension Funding Getting Worse in Coronavirus Era and What You Should Do
Pension Crisis and COVID-19
COVID-19 has exposed the already weak state and local government pension plans.1 Inaction by Congress for relief due to the Coronavirus pandemic could expose these pensions even further to create a string of city bankruptcies. Many states and localities are using rainy-day funds. Layoffs are underway, and more will follow without help from Congress.2
Since the last recession of 2008, governments around the country have increased their yearly pension contributions and slashed benefits for new hires. Some of these governments have moved employees to 401(k)-type plans that don't promise more than investments can earn in these accounts at retirement.
I will review the state of pension underfunding in state and local governments, and what is happening in Texas. Finally, I will provide some options for those currently enrolled in TRS or ERS pensions in Texas.
Pension Plans Underfunding Crisis
While only 13% of private-sector workers have a pension, 77% of state-and-local government workers have one.3 State and local pension funds made up 19% of Americans' retirement assets in 2017. More than 14 million Americans had a state or local government pension with a median annual pension of $17,894 in 2017.
Overall in 2017, states had 69 percent of the assets they needed to fully fund their pension liabilities. Texas is barely above that average at 76.1%. The amount of underfunding of state and local pensions is very high even with an 11-year bull market since the Great Recession of 2008.
The problem of underfunded pensions is that politicians have consistently neglected to contribute to these pension systems even during good budgetary times.4 While the economy was expanding from 2015-17, 27 states failed to put enough money into pensions systems to reduce their debt. Meanwhile, elected officials and pension administrators have endorsed overly optimistic assumptions on returns for their plans that did not materialize.
A Texas-Sized Problem
In 2020 in Texas, out of 99 state and local plans, 68 are underfunded by a massive $86 billion!5 Who will cover that shortfall?
As mentioned, Texas state and local pensions are not fully funded. The Teacher Retirement System (TRS) and Employees Retirement System of Texas (ERS) are Texas’ largest public retirement systems, serving about 1.5 million and 360,000 members, respectively. It should be noted that ERS members also may choose to participate in a supplemental 457 program to increase their retirement benefits. TRS members may also participate in 403(b) plans.
Together, TRS and ERS serve more than three-quarters of all state and local employees, dependents, and retirees in Texas. During the last 11 years, even during the longest bull market, the funded ratios of both systems have declined considerably.
According to the Texas Comptroller, there are three proposed policy options to improve the ERS pension fund’s finances:6
-Raising member and/or state contributions.
-Selling pension obligation bonds.
-Changing the plan to a defined contribution or hybrid plan such as a cash balance plan.
Raising contributions by members and moving more future employees to a defined contribution or hybrid plans seems like a possibility in the short term. Given the current situation in Texas, it is always good to plan.
Some Practical Options
You have several practical options. One you can simply collect your pension that you are entitled to when you retire. The pension may change by the time you retire with the benefits you receive could be less than originally planned. This would be of course be the worst-case scenario.
But a safer bet is to save additional money into an optional defined contribution plan such as a 403(b) or 457 plans. These plans are an option for Texas state and local government employees, including teachers, and should be taken advantage of. They are smart choices to supplement your Texas pension.
Of course, you should talk to a financial planner to learn about what option best suits your needs and how it fits into your overall retirement goals.
*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 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.