By Steve Metz
Georgia’s Teachers Retirement System (TRS) represents a significant cost to taxpayers and an important part of teachers’ compensation and benefits package. The current system is typical of government / teacher pension plans set up many years ago and it serves many teachers well (especially those who put in 30 or 40 years). There are a lot of situations where it does not work well in today’s world however, and there are many reasons to believe it should be revised.
From an employer’s perspective, a retirement plan should help with the Three R’s: Recruiting, Retaining and Rewarding employees. In the rest of this discussion I will address how the TRS could be modified to better meet these objectives.
The majority of Georgia’s teachers are hired at a young age, often right out of college. For this group of employees there are several issues that make TRS uncompetitive:
• Vesting – Under TRS any employee who works less than 10 years forfeits all employer -paid benefits (they do keep their own contributions, plus interest). Consider that for a moment – a prospective employer tells you, “We have a great retirement plan, unless you leave before 10 years, in which case you get nothing from us”. This approach was common 30-to-40 years ago, but today it is very uncompetitive with the private sector and a lot of public sector employers.
• Rate of Benefit Accruals – Without getting too tangled up in actuarial issues, let’s discuss how benefits accumulate under TRS. Like other traditional pension plans, for employees hired at young ages the value of their benefit under TRS grows very slowly for the first 10-to-15 years and then the value growth begins to accelerate. As they approach retirement the value climbs dramatically so that employees who stay until retirement age are well rewarded (this is often referred to as backloading). Again, this approach was common many years ago, but doesn’t fit today’s work force as well.
• There’s a flip side to the backloading issue as well. Due to the significant backloading of benefits under TRS a teacher who has put in 20 years stands to lose a lot if they want or need to change jobs, for example, if they must relocate to another state due to a spouse’s employment or other family issues. An employee in this situation has invested 20 years in part to get the benefits of the large ramp-up that happens right before retirement and will lose out due to circumstances beyond his or her control. This feature of TRS also can create “job lock” where an employee who isn’t happy (or perhaps effective) in their current job can’t afford to walk away from the big payoff that occurs in the last few years.
• This is TRS’ strong suit, at least for those teachers who put in a full career and stay until retirement age. For teachers who leave early – even after nine years of service – it is often very poor, however.
Going back to the Three R’s – I would argue that TRS is pretty weak at recruiting, given the amount of money spent. It is good at retention once teachers have more than 10 or 15 years of service, although it may have some painful issues for those who have to leave and can create job lock. Finally, it is probably best at the third R – rewarding teachers who stay until retirement, but less so for those who leave at a younger age.
Here are some potential principles that should be considered for system reforms:
1. Any changes should protect the current benefits and future expectations for teachers already in the system. This can be done in a number of ways, but a very common approach in recent years has been to give all current employees the option to stay with the current system or change to the new one.
2. The new system should become better aligned with today’s more mobile workforce and more competitive with other private and public sector retirement plans.
3. Benefits under the new system should accumulate more evenly over teachers’ careers. Under the current system a teacher who works 9 years and then leaves forfeits all employer -paid benefits. (This is also true for Georgia State government employees.) Even a teacher who works 20 years and then leaves misses out on the dramatic backloading effect.
There are a very wide range of possible options that could be considered for remaking TRS, including defined contribution plans like the popular 401(k) and IRA models, traditional pension plans, hybrid retirement plans that combine features of the first two and even combinations of these different types. The important principle to adopt first is that TRS should be modified to be more competitive with other employers and fairer to all teachers.
Steve Metz is a retired pension actuary. During his career he consulted with large and small employers in the public and private sectors in a variety of industries. Prior to retiring he was a Partner at PwC, an Associate of the Society of Actuaries and an Enrolled Actuary. This article was written for the Georgia Public Policy Foundation.