The Teacher Retirement System of Texas has a big problem on its hands.
A few weeks ago, it was discovered that TRS — the state agency responsible for overseeing teacher pensions — had signed a multi-year lease for luxurious office space in downtown Austin costing more than $326,000 per month. That handsome sum secured 100,000 sq. ft. spanning three floors at the not-yet-open Indeed Tower, a stunning high-rise featuring “extensive office amenities, including a fitness center, dedicated conference center and outdoor terraces.”
Not surprisingly, news of the luxury lease didn’t sit well. Even the Texas Retired Teachers Association, a special interest not known for urging agency constraint, let fly, saying: “People are just mad, and they don’t understand how (the retirement system) could be spending this much money on a lease.”
While TRS has since reconsidered its lease with Indeed Tower, the matter created a real PR nightmare for the agency. But truth be told, that was never TRS’ real problem. Its true crisis is its pension plan.
New data reveals that teacher pension plans are massively overpromised and underfunded. According to the Pension Review Board, TRS’ unfunded liabilities grew to $49.5 billion this month. That is, by far, the largest amount owed by any single plan and it’s more than half of all pension debt in Texas.
Other signals are flashing red too. The plan’s funded ratio, or the measure of current assets as a share of its obligations, hovered near 76 percent — well below the ideal 100 percent benchmark. And its amortization period, or the length of time needed to pay off the unfunded liability, is 29 years which is outside the PRB’s “recommended” guideline of between 15-25 years.
The data is clear: TRS’ pension plan is in trouble. If not addressed, future taxpayers and retirees face the possibility of paying higher taxes, receiving fewer services, seeing reduced benefits, or some combination of the three.
To keep this from happening, TRS must address the root issue: its dependence on the fundamentally flawed defined benefit system.
Defined benefit systems promise retirees a lifetime of guaranteed income, usually based on years of service and salary, but do so without knowing whether the fund can make good. Funding issues are common to DB systems because of their susceptibility to underperforming investments, rosy actuarial assumptions, and political chicanery. These systems — and the unfunded promises they make — are driving countless crises in communities nationwide.
The inherent flaws of the DB system forced most private sector employers to abandon it long ago. Today, it’s really only the public sector that still offers it.
Rather than rely on a broken system and continue to incur massive debts in the process, Texas policymakers need to find a more sustainable and reliable retirement option for public employees — much like the defined contribution model offers.
Defined contribution plans require the employee, the employer, or both parties to make contributions into an individual account, like an IRA. At the time of distribution, the amount in the account is made up of contributions and investment gains or losses. It’s that simple.
This type of plan is attractive on many levels. It is portable, allowing participants to switch jobs as opportunities arise.
It is sustainable, with fixed costs and known variables. And it is trustworthy, avoiding the major funding questions that plague DB systems.
In virtually every way, the DC model is superior to the DB system. Knowing this, it’s time to transition teachers — and all public employees — out of the current mode and into this better option.
Modernizing TRS’ retirement system should be a top priority in the next legislative session, especially considering the fund’s gargantuan pension debt and subpar measures. Once lawmakers have guaranteed the solvency of the system, then we can tackle the agency’s other problems.