By Kyle Wingfield
They say a journey of a thousand miles begins with a single step. The implication is that the first step won’t be the last.
That’s the right way to think about House Bill 109, which is intended to address the increasingly worrisome debt for Georgia’s teacher pension system. It’s an initial step toward securing the retirement income promised to our public-school teachers past and present, but it isn’t nearly enough to take the system as far as it needs to go.
The bill authored by Rep. Tommy Benton, a Republican from Jefferson and retired teacher, would make a few changes to the pensions of new teachers starting July 1. They wouldn’t be eligible for a pension until age 60, even if they’ve worked the requisite 30 years; their highest average salary would be calculated over five years instead of two and capped at $200,000; and they could be required to contribute up to 8.5 percent of their salary toward their pension instead of the current 6 percent cap.
But all these changes don’t add up to much of a difference for Georgia’s Teachers Retirement System. My friends at the Reason Foundation’s Pension Integrity Project, who study public pensions around the country, say TRS’s total accrued liabilities by 2037 would fall by less than 2 percent, from about $162.5 billion to $159.5 billion. Total contributions for that year would see less of a change, an increase of about $515 million. (These figures and the ones that follow were based on the original text of the bill; it has since been changed in ways even less likely to make the system more solvent.)
However, even with HB 109, Reason projects the system’s unfunded liabilities would be larger in every year through 2042 with the bill than they would be without it. The unfunded liabilities would still shrink over time, but absent any methodological changes they could be about $1.3 billion higher on average if HB 109 were to pass.
Why would the effects of HB 109 be so small? There are a few primary reasons.
First, the changes apply only to new teachers. The system already covers some 400,000 current and retired teachers and University System of Georgia employees, and the bill wouldn’t change the way their contributions and benefits are calculated. So we’re talking about a comparatively small number of people affected, especially in the early years.
Second, the bigger problems for TRS are the assumptions that undergird the plan, none of which would be changed by HB 109.
For example, the plan still assumes annual investment returns of 7.5 percent – which are increasingly hard to hit on a consistent basis even by a well-managed system like TRS. The “new normal” for returns from the kinds of assets in TRS’s portfolio is closer to 6-6.5 percent. Falling short of that means the system needs more contributions to pay its obligations and remain solvent. Legislators know that all too well, having roughly doubled the state’s annual contribution to TRS to $2 billion in recent years.
Finally, the bill avoids some of the biggest, but most controversial, changes. A recent state audit identified one of them as raising the minimum retirement age to 62 – higher than the 60 proposed in HB 109, but still lower than the 67 required for Social Security. (Not all of Georgia’s teachers participate in Social Security.)
Another big one cited in the audit is lowering the cost-of-living adjustment, or COLA, paid to retirees. The prevailing COLA is 3 percent per year, even though the audit found the actual rate of inflation has been lower than that in 21 of the past 26 years. Aligning the COLA with inflation would keep retirees from losing purchasing power while lowering TRS’s expenses by anywhere from $17 million to $700 million per year depending on the magnitude of the change, the audit found.
Teachers tend to view any changes to TRS as an attempt to rob them of benefits they’ve been promised. That’s understandable, but not true. They should be much more worried about what will happen to their benefits if lawmakers don’t shore up the system. HB 109 is an appropriate first step, but it can’t be the last one.
Kyle Wingfield is president of the Georgia Public Policy Foundation, an independent, nonprofit think tank that proposes market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (March 1, 2019). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.