Friday, January 20, 2012

Texas Retired Teachers , Defined Benefits, Defined Contributions And Social SecurityThree Proposed Reforms

                 Does the current Teacher Retirement system of Texas need reform? Apparently some politicians, journalists and other inquiring minds think so. The main purpose of this blog is to discuss the two main reform suggested: moving from the current defined benefit plan to a defined contribution plan and moving the retired teacher system into social security.

                                         The Current TRS defined benefit Plan

            The current retirement plan for Texas Retired Teachers is a defined benefits plan. The defined benefit plans are a promise of a defined amount of pension for life based on a  predetermined formula. In the case of the Texas retirement system the formula is to multiply the number of years paid into the system by 2.3 and then multiplying the average of the three highest salaries by that number. Lets say a teacher had taught for thirty years ; multiply thirty by 2.3 and you get 69; lets further suppose this retired teacher had an average of $ 50,000 for their three highest years; multiply that number by .69 and you get $34,000 for our fictional teachers lifetime pension. You probably already know the average retired Texas teacher makes quite a bit less. Though the purpose of this blog is descriptive and not persuasive I will reveal that this  current TRS defined benefit plan, with some tweaking, is my choice. Now, onward to the proposed alternatives.

                              The Defined Contribution Alternative

        Some state legislators and political commentators  such as  Bill King, Houston business man and occasional Houston Chronicle columnist. have suggested that future the TRS be changed from a defined benefits plan to a defined contribution plan. What would that mean?  Well, rather than a guaranteed lifetime amount, the retired teacher's final retirement amount would be based on the amount of contributions made by the teacher( with possible contribution from their school district) and how well or ,how poorly,  these  investments chosen by the retired teacher or at least those choices allowed by their district, perform over their active career in education, very much like the 403B plan most of us are familiar with. Obviously the investor ( teacher) would need to educate themselves about investing, which would require not only an interest in investing, but probably some aptitude for investing as well. My speculation is that under this system, some retirees would be better off, some about the same and some worse off, maybe a lot worse off.
                                  Moving To Social Security

    A second reform mentioned is that Texas would move all the teachers out of the TRS and join the social security system.  Would this be good for  future teacher retirees? Probably not.  The average social security recipient receives $18,000  while the average TRS annuitant makes $ 32,000, so although I was not a math major, I think I know enough math to recognize a bad deal when I see it. However, if retired teachers go another decade without a cost of living adjustment then the Social Security option might  start looking better. I also think a case could be made for changing Social Security into a true retirement system by requiring that all Americans including members of Congress join the system and assuring that all American workers  receive a pension worth 80 % of their working salary. However that's a topic for a future blog.

                                 Your Turn

     I would really love to have your opinion on:

     1. Do you favor keeping the current defined benefit TRS system or one of the reforms.

    2. Is there another reform you would favor?

   3. Another comment you would care to make?

      Just scroll to the bottom, click on comments and a space will magically appear for your comment Thanks for reading.