Message from the executive director

4-minute read

Retirees who have been retired 20 years or more will get a boost to their annuity in the new year. Thanks to the Texas Legislature’s efforts to improve the financial status of the ERS Retirement Plan, longtime regular service and law enforcement and custodial officer (LECO) retirees will get a cost-of-living adjustment (COLA).

The Plan’s financial health and a statutory mandate make an annuity increase possible for ERS retirees who retired on or before Dec. 31, 2004, and for surviving beneficiaries of those who retired by that date. ERS estimates 30,000 annuitants, approximately one-quarter of all current retirees and surviving beneficiaries, will get the COLA. In late December, ERS will mail a letter to every annuitant getting the COLA to let them know the amount of the increase and the new amount of their gross monthly annuity (before taxes and other deductions).

Texas Government Code Section 814.604 requires ERS to implement a one-time COLA to certain retirees and beneficiaries under the condition that the ERS Retirement Plan remains actuarially sound after the COLA. This will be a permanent, one-time 3% or $100 increase, whichever is less, in monthly annuity payments. Eligible annuitants will get the increase in their January 2025 annuity payment and will continue to get that new gross annuity amount every month. There are no provisions in statute to provide any other COLAs for retirees in Groups 1, 2 and 3 or surviving beneficiaries of retirees in those groups, even if they meet the 20-year retirement threshold at some time in the future.

The standard for actuarial soundness

What exactly does “actuarially sound” mean? It means a retirement fund has enough money to pay the unfunded liabilities (or debt) within a 30-year period. Texas statute set that 30-year standard, and recent actions by the Texas Legislature have helped the ERS Retirement Plan to meet the standard. A plan can be considered “sound” even if it doesn’t currently have all the money it needs to pay earned benefits.

Specifically, in 2021, state lawmakers passed legislation to provide annual “legacy payments” to the ERS Retirement Plan. The legacy payments are in addition to the percent-of-payroll contributions the state regularly makes. The state will continue to make the legacy payments, currently about $500 million each year, until the ERS Plan is fully funded, which is estimated to happen by 2054.

The challenge of retirement benefit increases

ERS’ retirement plans for most current retirees were not set up to provide COLAs, additional retirement payments (sometimes called “13th checks”) or other annuity increases. These types of increases were not included in the benefit or funding structure of the plans.

From the late 1980s through the early 2000s, when the ERS Retirement Plan was funded at more than 100%, the Legislature passed bills granting retirees a number of annuity enhancements—including 13th checks, COLAs and increases to the annuity multiplier. (The increases to the multiplier benefited and still benefit future retirees in Groups 1, 2 and 3, but the other enhancements were only for retirees at the time.) These benefit enhancements were not pre-funded or paid for with extra contributions, but instead paid with plan assets. As a result, it was much harder for the plan to weather the major economic downturns of 2001 and 2008 and changes in the state workforce. This led to significant unfunded liabilities that meant the ERS Retirement Plan was not actuarially sound for over 20 years.

As fiduciary of the ERS Retirement Trust Fund, ERS is obligated to all the members of the plan. We must work to ensure the financial stability of the retirement plans we administer. The state has made significant financial commitments to restore all the plans’ financial health, and ERS will continue to work to maintain their health.

The importance of a healthy retirement fund

Retirement annuities are guaranteed no matter what the retirement plan’s financial status is. The state is legally obligated to pay them without regard to the plan’s funding level. The issue is that if the Trust Fund doesn’t have enough money to pay the annuities, the Legislature must find the money elsewhere to directly pay monthly pension benefits to retirees and surviving beneficiaries.

On the other end of the spectrum, when a retirement plan is financially healthy, it can invest more of its balance to earn more interest income and become even healthier. Currently, about 60% of your annuities are paid from investment earnings, with the rest paid from state and member contributions. The ability to pay annuities with investment earnings is a gauge of an efficient and effective pension.

Of course, it would be nice to provide a COLA or other increase to all retirees, and to provide them regularly. But that’s not what the law allows, and it’s not the benefit you or the state paid for when you were working. The funding and benefit structure of ERS’ retirement plans must prioritize their overall financial health to make sure pension benefits will be paid for generations to come.

Porter Wilson