April 28, 2015

Teacher’s Retirement at Risk

The President of the Texas Federation of Teachers, Linda Bridges, has warned teacher retirees about HB 2506 in the Texas House Pension Committee. She writes, “This is a bill Texas AFT will strongly oppose. A defined contribution plan is a bad idea. HB 2506 by Rep. Warren Chisum of Pampa creates a defined contribution retirement plan for newly hired school employees.

A national study has found that defined-benefit plans like the TRS system get more bang for the buck, costing only 46 percent as much as defined-contribution plans for each dollar of benefits delivered. (That’s partly because large, pooled, professionally managed funds like TRS get better average returns than individual accounts that are partly eaten up by fees.)    

–Defined-benefit plans like TRS thus are more efficient and cost-effective than defined-contribution plans. Two states that switched to defined contributions—West Virginia and Nebraska—found this out the hard way and have switched back in recent years.     

–The TRS pension system has a funding ratio that exceeds the 80-percent level usually cited as the mark of a healthy fund.

–The TRS rate of return has exceeded the 8-percent rate targeted by TRS actuaries for decades.

–As a result, state taxpayers’ share of benefits paid is only about 20 percent. Earnings on investments cover some 60 percent of benefit payouts; the other 20 percent comes from employee pension contributions.

–Benefits in Texas are hardly extravagant, with 68 percent of TRS pensioners receiving less than $2,000 per month.

–The pension fund gained 14.8 percent last year, and over the years since the 8-percent target was set the average return has been 9.2 percent.

–Taxpayers put $2.3 billion into TRS last year, but the system was able to pay out $6.6 billion in benefits. The spending of those benefits generated $900 million in state and local taxes, so the net cost to the taxpayer for $6.6 billion in benefits paid was only $1.4 billion.

Texas AFT testified back on January 27, 2011about the flaws of a defined contribution plan. Our Web site has archived Hotlines and the January 27 edition details the points Texas AFT made at the briefing.   If HB 2506 is voted out of committee, Texas AFT will ask you to mobilize members to fight this legislation.   In addition to the work being done here, AFT has had an Ad Hoc Committee on Revenues and Retirement Security that just issued their report (attached). This report will be presented to the AFT Executive Council at their May meeting.   We will keep you apprised of the work here at home and at the AFT on retirement issues.”

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