The state pension plan funding gap is well-documented -- according to Pew, the gap between the promises states have made for public employees’ retirement benefits and the money they have set aside to pay these bills was at least $1.4 trillion in fiscal year 2016. For a blog dedicated to providing high-quality analysis and information on teacher pensions, it’s clear that there is a problem.
Let’s talk solutions.
While traditional, back-loaded pension plans fall short of providing adequate retirement benefits to all members, there are better options. And, contrary to a public debate that often pits pensions against 401ks, there are other alternatives that would better balance the needs of employers and employees.
As one alternative example, the Texas Municipal Retirement System (TMRS) is legally a defined benefit cash balance plan. As of December 2016, 872 Texas cities had opted into the plan, covering 108,500 active members and 59,000 retirees. Participating cities select an employee contribution rate (of 5, 6, or 7 percent), an employer match (1:1, 1.5:1, or 2:1), and the contributions go into a worker's account. The plan invests the money and guarantees a rate of return of at least 5 percent. This provides a more portable benefit with a steadier accumulation of assets than the typical defined benefit plan.
The plan also helps employees once they retire. When the employee reaches retirement eligibility, the money in their account is annuitized into regular monthly paychecks. These paychecks allow for sustained monthly income, mirroring the benefits and stability of a traditional pension plan without the back-loaded accumulation under traditional pension plans. (See more details of how the plan works here.)
No plan is perfect. Here, employees might be able to earn higher return in a defined contribution, 401k style plan, but to do that, they would have to sacrifice the guarantee. Employers still bear some risk, but it’s smaller than under a traditional defined benefit plan. Still, this system allows employers some level of customization, and the portability piece makes it appealing to employees. TMRS, a defined benefit cash balance plan, is just one of many retirement options that could better address the cost and portability problems that are prevalent in the plans offered to public school teachers.