Your State of Texas Retirement benefit and the ERS Retirement Trust Fund
Part III: What’s true and what’s not about the Retirement Trust Fund and benefits
The ERS Retirement Trust Fund is facing serious long-term financial issues. As ERS works with the Texas Legislature to get the Fund back on the path to fiscal health, let’s correct some common misconceptions about our retirement funding and benefits.
Misconception: The ERS Retirement Trust Fund is in trouble because retirement benefits are too generous.
Fact: State agency employees earn reasonable retirement benefits as part of their overall compensation package. Throughout their state careers, employees contribute to their own retirement benefits at roughly the same level as the state. (Currently, employees contribute 9.5% of their pay, pre-tax, each month. The state also contributes 9.5% of overall state payroll, and each agency contributes 0.5% of its payroll.) The average retiree works about 22 years for the state and gets a monthly annuity payment of less than $1,750, or about $21,000 per year. Unlike in many other government retirement programs, State of Texas retirees do not get guaranteed cost-of-living adjustments (COLAs) or other regular increases to their annuities.
State of Texas Retirement benefits are designed to be only one part of a retiree’s post-career income. State agency employees also contribute 6.2% of their pay to federal Social Security throughout their careers, and ERS encourages them to save in personal retirement accounts, like a Texa$averSM 401(k) or 457. Together, a State of Texas Retirement pension, Social Security and personal savings should provide state employees with a financially secure retirement.
Misconception: The Retirement Trust Fund would not be in trouble and could become financially healthy again if it had better investment earnings.
Fact: Investment earnings on the Retirement Trust Fund are meeting long-term goals, even in extremely volatile markets. One reason the Trust Fund is in trouble is that it has not gotten adequate contributions over the last 20 years. Also, many benefit increases approved by the Texas Legislature in the 1990s—like additional retirement payments (sometimes called 13th checks) and COLAs—were not funded, which added to the unfunded liability. Better investment earnings and changes to future retirees’ benefits would help improve the Fund’s solvency.
However, increased contributions are more important to restore it to financial health.
ERS focuses its investments on long-term performance and stability, not short-term market shifts and volatility. Unlike many who invest in the stock market, we must think in the very long term, to ensure we can pay for benefits many decades into the future. As we manage the Retirement Trust Fund, we seek ways to meet or exceed our investment targets while limiting risk and keeping administrative costs low. We also must ensure we have enough cash every month to pay hundreds of millions of dollars in current annuities. That limits how we can invest. The result is that sometimes our investments don’t do as well as individual investors’ during stock market highs, but in downturns we tend to do better than the market as a whole.
Misconception: Defined benefit (DB) retirement plans like ERS’ are expensive and inefficient. Changing to a defined contribution (DC) plan, like a 401(k), or a hybrid plan that combines features of DB and DC plans could fix the problems with the Fund.
Fact: Changing to a defined contribution or “hybrid” plan will not erase the debt, or unfunded liabilities, in the current plan. The state will still owe that money to future retirees.
Defined benefit plans have proven to be the most cost-effective way to fund retirement benefits, as long as they get the required contributions based on sound actuarial principles. According to the National Institute on Retirement Security, DB plans deliver at least the same benefit as DC plans at half the cost. Their cost-effectiveness comes from the ability to compound investment earnings and pool funds to be invested by professionals. Currently, investment earnings pay about 60% of each retiree’s annuity, and state contributions to the ERS Retirement Trust Fund are less than 1% of the state’s total budget.
Misconception: If the Fund runs out of money, retirees could have their benefits cut or won’t get their annuities at all.
Fact: In some cases, government employee pension programs that ran out of money (or came close to doing so) reduced retirees’ annuity payments as a way to ease the financial burden on government budgets. Those actions occurred after lawsuits between the governmental entities and employees and retirees, and no such actions have happened in Texas. Still, they show there is the possibility for such measures.
The state is obligated to pay retirees the retirement benefits they earned over their careers, whether or not there is money in the Retirement Trust Fund. If the Fund runs out of money, the state would pay annuities out of general revenue, which could cost at least four times as much as pre-funding and allowing the money to compound investment earnings.
Misconception: Pensions for state employees are an unfair burden on Texas taxpayers.
Fact: The state’s contributions to the ERS Retirement Trust Fund account for less than 1% of the state budget each year. The contributions are a benefit state employees earn as part of their overall compensation. The State of Texas Retirement program helps the state attract and retain employees to do important work that makes Texas a great place to live, work and visit.
In addition, state employees contribute their own money to the ERS Retirement Trust Fund throughout their careers. They currently pay 9.5% of their salary to the Fund (in addition to their 6.2% contributions to Social Security).
Finally, it’s important to note that the ERS retirement program benefits local economies across Texas: We make annuity payments to retirees or beneficiaries in 253 of the state’s 254 counties. Those payments help annuitants stay independent and active contributors to their communities.