Today’s post was written by the Texas Pension Coalition’s Keegan Shepherd.
Public pensions have been an integral part of the Lone Star State for a long time. The Teachers Retirement System of Texas (TRS)—one of the twenty largest pension systems in the world—dates back to the late 1930s, following voter approval of an amendment to the Texas Constitution. Even in its first year, TRS had well over 35,000 participants, and it currently has over a million active and retired members. Texas’ other major statewide public pension system, the Employees Retirement System of Texas (ERS), has deep roots, too, as it was created in the late 1940s.
Over the next several decades, both plans expanded to respond to key needs. During the late 1970s, ERS was given responsibility for the Law Enforcement and Custodial Officer Supplemental fund (LECOS). TRS, meanwhile, gradually increased its standard annuity formula and periodically adjusted pension payments to account for the rate of inflation.
In an ideal scenario, the benefits offered by public pension systems keep up with the needs of retired workers. This ensures that public employees can actually retire at a reasonable point in their lives and that their pension benefits truly cover their basic needs. Since the turn of the century, however, there have been several challenges that have kept ERS and TRS from being as strong as they could be—and, in turn, from truly offering retired public employees what they deserve.
One major issue has been the lack of cost-of-living adjustments (COLAs), which ensure pensions keep up with the pace of inflation. Even a one- or two-percent increase in the cost of living can put considerable strain on the budget of retirees on a fixed income. When these incremental changes in the cost-of-living compound over the course of several years, a fixed income that used to cover all of a retiree’s needs will no longer cover the basics. This becomes particularly clear when you factor in that public sector pensions in Texas are typically a fraction of a person’s final earnings: retirees are already making do with less. Insurance payments and utilities don’t suddenly go away when someone retires.
We see these inflation increases throughout Texas. The most recent figures for the Dallas-Fort Worth (DFW) metropolitan area, for example, show an overall 2.1% increase in prices between February 2019 and February 2020. Energy costs had a much higher spike in the DFW metro area during that time period. While Houston had more modest inflation increases, overall costs were still up 1% at the beginning of the year compared to a year earlier.
When pensions keep up with the pace of inflation, retirees don’t have to make harrowing choices like skipping medications or forgoing necessary medical procedures. Unfortunately, retired state employees have not seen an inflation adjustment in nearly two decades. School employees who have retired since 2004 have never seen a fixed COLA cost of living adjustment. Even though TRS recipients received a one-time “13th check” of up to $2,000 during the last legislative session, we know from our own research that the “13th check” often quickly went to necessities. On average, retired state workers receive roughly $1,700 per month from ERS; retired school workers receive around $2,000 a month but do not receive Social Security. Under these circumstances, we need lawmakers to commit to making pensions truly sufficient for retirees’ needs.
Another related issue is our state legislature’s repeated refusal to keep ERS properly funded. Pensions make the majority of their money from investment returns—and those returns need to be maintained at a certain level to ensure that the system can pay annuities in full and on time. When public pension investment returns fall short, then state governments have a responsibility to infuse the system with money (or increase state contribution rates), so that the system doesn’t fall into disrepair. What ERS faces right now is chronic underfunding since the turn of the century—an issue that only gets worse the longer it is put off.
Amid all of these developments, special interests have attempted to undermine the integrity of our two statewide public pension systems by insisting we abandon them for 401(k)-style retirement plans. Session after session, these voices trod out the same tired talking points about defined benefit plans. But none of these talking points hold water. Time and again, the numbers bear out a simple truth: defined-contribution plans cost more money than pensions and offer far less in return. Worse yet, because defined-contribution systems don’t pool risk, an individual’s retirement savings can plummet in a short amount of time. By contrast, pensions are better suited to weather recessions because they pool risk, meaning years of investments don’t evaporate in a matter of months.
Here’s what remains true: ERS and TRS are vital elements to the wellbeing of the Lone Star State. When these two systems are adequately funded, our state and school districts can recruit and retain qualified workers who are willing to trade lower public sector pay for the guarantee of a secure retirement. These workers can then retire with dignity and security, enabling younger generations to enter the workforce and serve the public when they’re ready.