Pension Flexibility: Texas

Analysis of Texas's policies

Texas only offers a defined benefit pension plan to its teachers as their mandatory pension plan.[1] This plan is not fully portable, does not vest until year five and does not provide any employer contribution for teachers who choose to withdraw their account balances when leaving the system. It also limits flexibility by restricting the ability to purchase years of service. [1] SB 1458, passed by TX Legislature in 2013, added 2 additional tiers to the retirement plan. Looking forward, teachers hired on or after 9/1/2014 that were also not members of TRS prior to 9/1/2005 belong to Tier 5. Changes include raising age-eligibility requirements.

Vesting in a defined benefit plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Non-vested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Texas's vesting at five years of service limits the options of many teachers who leave the system prior to this point. According to a recent report, 45 percent of employees in Texas's teacher-covered pension plan vest, meaning that 55 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions.

Teachers in Texas who choose to withdraw their contributions upon leaving only receive their own employee contribution plus interest. This means that those who withdraw their funds accrue no benefits beyond what they might have earned contributing to basic savings accounts. Therefore, teachers leaving the pension system would have saved only 6.7 percent of their salary plus interest (see pension sustainability goal), which is significantly below the level conventionally recommended by retirement advisers for individuals not also contributing to Social Security. While Texas's relatively low mandatory contribution rate allows for flexibility in teachers' retirement savings, it also means that the state needs to educate teachers on what happens if they leave the system and encourage savings in other portable supplemental plans. Furthermore, teachers who remain in the field of education but enter another pension plan (such as in another state) will find it difficult to purchase the time equivalent to their prior employment in the new system because they are not entitled to any employer contribution.

Texas limits teachers' flexibility to purchase years of service. The ability to purchase time is important because defined benefit plans' retirement eligibility and benefit payments are often tied to the number of years a teacher has worked. Texas's plan allows teachers to purchase one year of out-of-state previous teaching experience for each year of Texas service, up to 15 years. While better than not allowing any purchase at all, this provision disadvantages teachers who move to Texas with more teaching experience. In addition, because purchased service may not exceed Texas service, teachers either have to purchase years one at a time or wait to purchase a lump sum, which makes the cost much more expensive than if allowed to purchase all years at the start of service in Texas. The state's plan does not allow for the purchase of maternity or paternity leaves, which is a severe disadvantage to any teacher who needs to take leave for parental care or for other personal reasons

Citation

Teacher Retirement System of Texas, TRS Benefits Handbook, December 2015. Aldeman, C. and Rotherham, A. (2014). Friends without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security, Bellwether Education Partners.

Recommendations for Texas

Offer teachers a pension plan that is fully portable, flexible and fair.
Texas should offer teachers for their mandatory pension plan the option of either a defined contribution plan or a fully portable defined benefit plan, such as a cash balance plan. A well-structured defined benefit plan could be a suitable option among multiple plans. As the sole option, however, defined benefit plans severely disadvantage mobile teachers and those who enter the profession later in life. Because teachers in Texas do not participate in Social Security, they have no fully portable retirement benefits that would move with them in the event they leave the system.

Increase the portability of its defined benefit plan.
If Texas maintains its defined benefit plan, it should allow teachers that leave the system to withdraw their employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience at the start of employment, at least one year per approved leave of absence, and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.

Offer a fully portable supplemental retirement savings plan.
If Texas maintains its defined benefit plan, the state should at least offer teachers the option of a fully portable supplemental defined contribution savings plan, with employers matching a percentage of teachers' contributions.

State response to our analysis

Texas was helpful in providing information that enhanced this analysis.