Texas teachers would be better off without a retirement system

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During my tenure at Texas House from 2013-2019, local school districts represented the largest employers in my district. This is how many teachers, active and retired, live in House District 65 in Carrollton, Lewisville and the Northwest. Being the son of public school teachers myself, I have always enjoyed being around them and speaking occasionally at their events. Truly, some of our society’s unsung heroes.

There were two major issues that came up almost every time I spoke to a group of teachers, and those two issues were their pension plan and their health care plan. Given recent concerns about teacher retirement being the cause of a continued shortage of teachers, I would like to focus on this issue here. The problem with the pension plan that I heard from retired teachers and teachers nearing retirement was a desire to see the continuation of their defined benefit plan, a pension that provides some payout over time. They feared it would be converted to a defined contribution plan modeled on the 401k plans that most private sector employees currently have.

My answer has always been the same: we made a promise to you about your retirement, and I pledged to do everything in my power to make sure we kept that promise. Promises made, promises kept.

So yes, we have to fulfill our obligations. But that doesn’t mean Texas taxpayers or teachers should forever be tied to a defined-benefit pension plan. Nor does it mean that the defined benefit plan is the best outcome for state pensioners.

Under a defined benefit plan, a teacher with about 35 years of service will receive a monthly benefit of about 75-80% of their average salary during the last three years of their employment. The advantage will never decrease based on the stock or bond market, but it will never increase either.

The state and local school district (meaning you and me as taxpayers) contribute a certain percentage of each teacher’s salary (about 7.5%) and the teachers themselves contribute a similar amount each pay period to build up the funds necessary to pay this benefit for the rest of the retired teacher’s life. The challenge in this system is that there is no guarantee that the 15% contribution made by the government and the teachers will be sufficient to fund the annuity that has been promised. When there are not enough assets in the retirement fund to pay all the benefits that have been promised, the plan is classified as underfunded.

In the past, taxpayers have stepped up and added more money to the retirement fund to meet what should be long-term needs. This type of plan brings a lot of uncertainty to state budgeting, and because of our commitment to this plan, funding for other state programs must be reduced or taxes must be increased to respond to what has proven to be an ever-changing funding need. .

It is important to note that a whopping 94% of Fortune 500 companies have abandoned their defined benefit plan in favor of a defined contribution plan. However, most companies have done so with a hybrid approach which I believe would best serve Texas teachers and provide more certainty for taxpayers.

In a hybrid approach, current retirees, as well as teachers active in a number of years before retirement, would continue to participate in the defined benefit plan and receive a fixed monthly pension. With over $150 billion in plan assets and prudent investment management, there are enough assets to continue to provide these benefits. However, if the investment markets have negative or minimal long-term investment returns, the state should act as a safety net to guarantee these payments by making additional contributions to the fund if necessary. Legislation is to be passed in 2023 codifying this requirement.

For new teachers and teachers who have not yet worked for a certain number of years, say seven years, they would be covered by a defined contribution plan (think 401k) where the state and local district would contribute a percentage specific to the teacher’s salary. and the teacher would also contribute an amount. These funds would be invested in a mix of stocks and bonds (under the direction of the teacher) and would be held in the name of each specific teacher. When the teacher retires, the full value of the account will be theirs to live on during retirement and pass any balance on their death to their estate or designated beneficiaries.

Let’s look at some numbers and compare the defined benefit plan and a defined contribution plan. Under the current defined benefit plan, a teacher who has earned an average of $60,000 over the last few years of a 35-year career would receive a fixed monthly pension of approximately $4,000 ($48,000 annually), which represents 80% of his final average salary.

In a defined contribution scenario, assume that the state continues its annual contribution of 7.5% and the teacher continues with its current contribution of 7.5%. Starting salaries, on average, for teachers in Texas are $44,000, so let’s assume that over a 35-year career, a teacher starting today has an average salary of $60,000. during his career. Let’s also assume that the average annual investment return in the teacher account is 6% (over the long term, a very conservative assumption).

Upon retirement, the teacher would have an account balance of approximately $1.1 million. If the retired teacher then decides to receive a monthly check from the account for $4,000 (as he would have received under a defined benefit plan) but continues to have the remaining assets in the account invested as in the past (assume 6% per year), the teacher would still have a balance of $1.7 million after 20 years of retirement! What a huge benefit for the retired teacher and her family. But it’s also a value for taxpayers and budget writers, who know what their annual commitment is with absolute certainty.

Promises kept, promises kept… and improved.

Ron Simmons is a former Texas House representative. He wrote this column for The Dallas Morning News

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