Policymakers Can Learn From Promising Practices
Successful pension systems, like those in South Dakota, Tennessee, and Wisconsin, operate under policies that achieve cost and benefit goals, manage risks, and focus on retirement security. Many other states are adopting or weighing additional promising policies that could make costs more predictable without jeopardizing plan solvency or retirement security.
Several policies, particularly funding above the actuarial contribution, lowering return assumptions, establishing variable-benefit provisions, and using stress testing and risk analysis, stood out in Pews analysis as effective tools to improve pension funding.
Model Retirement Systems Offer Blueprints For Success
Every state is different, but a close look reveals that despite different plan designs, funding policies, and approaches to governance, South Dakota, Tennessee, and Wisconsin share important approaches. In particular, all three states provide a path to retirement security for long- and shorter-term workers and employ risk management policiessuch as sharing gains and losses among employers, workers, and retireesto ensure they can provide those benefits while holding costs stable at sustainable levels.
Despite their different plan designs, South Dakota, Tennessee, and Wisconsin share a commitment to setting and achieving explicit employer cost targets, while still meeting retirement security needs across the workforce, and to proactively managing risk. For states such as Pennsylvania that have faced challenges managing negative consequences of past policy choices, these strategies, together with recent improvements to funding policy and strengthened balance sheets and budgets, offer a chance to achieve similar results.
Calculating How The Wep Will Affect You
I know this is a lot to follow, so if you want to take a shortcut in figuring out how the impact of the WEP, you may want to use my free calculator.
This calculator will tell you:
- The amount of monthly Social Security benefit you can expect after the WEP reduction .
- The number of substantial earnings years you already have
- How additional years of substantial earnings will affect the WEP penalty
To use this calculator youll need to get a copy of your earnings history from the SSA. You should only put in your years of earnings that were covered by Social Security.
- My article on the potential repeal of the WEP
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Trs Of Georgia And Social Security: The Good The Bad And The Ugly
As a former teacher, Im honored to have the opportunity to serve many teachers as clients. From public school teachers, to private school teachers, and retired teachers of all kinds, serving those who serve our children is quite fulfilling.
Specifically, for those who serve in the Georgia public school system, there is a fantastic retirement perk that creates a financial reward, which I believe, is greatly underestimated. And that retirement perk is found through a combination of the state of Georgia pension plan, called Teachers Retirement System of Georgia , and the state of Georgia health insurance retirement plan.
The prevailing rhetoric is that the field of education does not pay well. But I completely disagree with that viewpoint. Although it is true that the salary of an educator is not financially lucrative, there are perks to that profession that make it compete with executive level compensation of some businesses. Ill take a moment to explain. Because otherwise, a current teacher who reads this, might feel compelled to pick up the apple off his or her desk and throw it in my direction.
Disclosure:Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. These are hypothetical examples and are not representative of any specific investment. Your results may vary.
Georgia Teacher Pension Fund Dropped $15 Billion In Rough Year For Stocks
As the nation was coming to grips with the COVID-19 pandemic in early 2020, officials with Georgias massive teacher pension fund watched assets plummet $15 billion in a few months when the stock market tanked.
The economic recovery and soaring stock market that followed brought the Teachers Retirement System which is partially funded by taxpayers to new heights.
And then it plunged again, losing $15 billion in the recently completed fiscal 2022 as the stock market dipped again over the past year.
Buster Evans, executive director of the pension system relied on by 400,000 public educators and retirees, said gains in recent weeks since the fiscal year ended June 30 had brought the TRS assets back up 5.45% by Wednesday morning.
Its been an unusually wild ride for a system that saw its fund jump about 60% in the stock runup after the economy reopened following the short COVID pandemic shutdown, only to take a substantial dip in fiscal 2022.
The health of the states teacher pension system is closely watched because so many educators and retirees depend on the benefits. And because state lawmakers have raised concerns about its long-term financial viability.
The pensions which go to K-12 public school, university and technical college educators are funded through a combination of employee contributions, money from taxpayers and investments.
Even more working educators currently pay into the system.
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States Have A Unique Opportunity To Achieve Pension Fiscal Balance
The combination of states improving fiscal responsibility and recent budget surpluses presents an opportunity for states to make pivotal changes that could bolster the sustainability of public pensions and promote predictable costs and contributions in the future. High-performing states with well-funded pension plans and stable costs show that such success is achievable and provide blueprints for policymakers in other jurisdictions to follow.
States with consistently high funding ratios can require smaller employer contributions while ensuring that workers and retirees can count on receiving promised benefits. The 10 states with the best-funded pension plansat least 85% funded in 2020contributed 12% of payroll to their plans annually, on average, and all met or exceeded the contribution benchmark in 2020. By contrast, the 10 worst-funded states were less than 60% funded in 2020 and had an average employer contribution rate of 27% of payrolland all but three fell below the contribution benchmark in 2020.2
Understanding The Bills Short
During last years legislative session, Georgias House Retirement Committee requested cost estimates of House Bills 662 and 667 . Both measures propose changes aimed at improving the solvency of the Teachers Retirement System of Georgia, a plan currently sitting at only 77 percent funded and holding nearly $22 billion in unfunded promises made to Georgia educators.
Since the fiscal impacts will likely drive the committees deliberation on these bills in the upcoming legislative session, understanding the bills short-term costs along with their potential long-term benefits is critical to fully evaluating these reforms.
Actuarial modeling performed calibrated and confirmed by an internal short-term actuarial study prepared for Georgias House Retirement Committeeprovides some insight into the long-term impact of the proposed legislative changes.
The two bills address TRS challenges in different ways:
- HB 662 would lower the assumed rate of return for TRS from 7.25 percent to 6.75 percent.
- HB 667 would require all current legacy unfunded liabilities to be paid off by 2037, and put all new unfunded pension liabilities accrued in any given year on a 15-year amortization schedule instead of the current 30 years.
- Both bills would accelerate the frequency of internal TRS actuarial experience studies from the current every five-year review to a lookback every three years.
Figure 1. Projected Employer Contributions with Reduced Return Assumption
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Teachers Retirement System Of Georgia Explained
State lawmakers introduced several bills in the 2019 legislative session that could significantly alter the Teachers Retirement System of Georgia if passed in 2020. There are 390,000 current and former Georgia educators participating in the pension system as either active members or benefits recipients. Any changes to TRS have immense implications to the states education workforce as well as the financial health of the state of Georgia. This fact sheet explains the basic concepts of TRS, how it is funded and where it stands financially.
What To Do If You Still Have Questions
Dont leave without getting your FREE copy of my latest guide: Top 10 Questions and Answers on the Windfall Elimination Provision. You CAN simplify these rules and get every dime in benefits you deserve! Simply click here
If you have questions, you could leave a comment below, but what may be an even greater help is to join my. Its very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time Ill even drop in to add my thoughts, too.
You should also consider joining the nearly 400,000 subscribers on my YouTube channel! For visual learners , this is where I break down the complex rules and help you figure out how to use them to your advantage.
And dont leave without getting your FREE copy of my Social Security Cheat Sheet. This is where I took the most important stuff from the 100,000 page website and condensed it down to just ONE PAGE! Get your FREE copy here.
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Rising Costs Can Crowd Out Other Priorities
Nationwide, however, the rise in pension contributions, though necessary to bolster the fiscal health of state retirement systems, also created budget challenges. The 7% annual growth in employer contributions from 2007 to 2020 allowed plans to catch up to actuarial recommendations and amortization benchmarks. But because state revenue grew at less than half that rate over the same period, the share of public resources going toward pension contributions rose significantly, sapping more than $300 billion in state and local funding that might otherwise have been available for other spending priorities.
The contribution benchmark for state pension plans also grew over this period. In 2007, plan actuaries recommended contributions of $60 billionof which states paid only $50 billionbut the figure rose rapidly to $87 billion in 2012. By 2017, the benchmark was more than $120 billion. This growth reflected the combined impact of investment returns that fell short of expectations, the costs of catching up on prior missed contributions, and a shift among plans to using more realistic financial assumptions than in the past.
Funding Above The Actuarial Contribution
States that follow the best practice of using actuarial recommendations to determine contributions typically contribute precisely the amount recommended and no more.3 But because the future is always uncertain, those recommended contributions may increase if investments fall short or something else goes wrong financially. Conversely, should markets or the overall economy outperform expectations, the recommended contributions could decrease.
One approach that states have taken to manage this uncertainty and cushion budgets from unexpected costs is to pay more into pension plans when they are flush with tax revenue or windfall investment returns. By increasing contributions on such occasions, states with underfunded plans can make additional progress in paying down pension debt while states with well-funded pension plans can build a cushion against a future market downturn.
Tennessees reserve fund, discussed previously, takes this idea of funding above required contribution levels further than the practices of any other state by setting target contribution rates that exceed actuarial minimums and then putting the overage aside to stabilize future costs. The state uses the reserve fund to make up any short-term difference in actuarial contribution rates from a recession or dip in financial markets, while allowing employer costs to stay the same. This shows how contribution policy design is a key tool that states can use to reduce the budget risk posed by public pension plans.
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Understanding The Windfall Elimination Provision
The Windfall Elimination Provision is simply a recalculation of your Social Security benefit if you also have a pension from non-covered work where no Social Security taxes were paid. The normal Social Security calculation formula is substituted with a new calculation that results in a lower benefit amount.
It would be easy to write a multipage essay on the WEP, but the necessary components can be distilled to a few simple points:
- The maximum Social Security reduction will never be greater than one-half of your pension amount. This is capped at a monthly reduction of $558 maximum WEP reduction .
- If you have more than 20 years of substantial covered earnings , the impact of the WEP begins to diminish. At 30 years of substantial covered earnings, the WEP does not apply.
Image Source: Devin Carroll, Data: Social Security Administration
This phase-out of the WEP reduction offers a great planning opportunity if you have worked at a job where you paid Social Security tax. For example, if you worked as an engineer for 20 years before you began teaching, you may be able to do enough part time work between now and when you retire to completely eliminate the monthly WEP reduction.
Would it be worth it? If you consider how much more in benefits you could receive over your retirement lifetime, it could be worth $100,000 in extra income over a 20-year retirement.
Georgias $100 Billion Teacher Pension System On A Financial Roll
When COVID-19 hit Georgia in March 2020, the stock market tanked and so did the assets of the pension system relied on by 400,000 public educators and retirees.
Buster Evans, executive director of the Teachers Retirement System, felt sick to his stomach as billions of dollars on paper were lost.
But a year-and-a-half later the TRS is currently valued at about $103 billion after seeing a 58% jump in value due to gains from stocks and other investments since that low point. At the end of June, it reported having 92% of the assets needed to pay future benefits, a big improvement from recent years.
The huge increase will probably have a political effect: It could dampen talk during the 2022 session of the General Assembly about making changes to the pension system, something some Republican lawmakers have pushed for in recent years.
The topic of pension reform is never going to go away, said Evans, a former longtime Georgia school superintendent.
But he added that in fiscal 2021, which ended June 30, TRS investments had their biggest year since 1986.
When you have a year like that, it helps tremendously, he said.
The states teacher pension system is closely watched because so many educators and retirees depend on the benefits. And because state lawmakers have raised concerns about its long-term financial viability.
But Martin, too, said the strong financial numbers, for now, make it less likely the General Assembly would try to change the pension system.
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Impacts Of Proposed Changes To Teachers Retirement System In Georgia
During last years legislative session, Georgias House Retirement Committee requested cost estimates of House Bills 662 and 667 both measures propose changes aimed at improving the solvency of the Teachers Retirement System of Georgia, a plan currently sitting at only 77 percent funded and holding nearly $22 billion in unfunded promises made to Georgia educators.
Since the fiscal impacts will likely drive the committees deliberation on these bills in the upcoming legislative session, understanding the bills short-term costs along with their potential long-term benefits is critical to fully evaluating these reforms.
Actuarial modeling performed by Reason Foundations Pension Integrity Projectcalibrated and confirmed by an internal short-term actuarial study prepared for Georgias House Retirement Committeeprovides some insight into the long-term impact of the proposed legislative changes.
The two bills address Georgias Teachers Retirement System challenges in different ways:
Both changes would result in higher annual contributions into the system in the short-run, but for that cost Georgians would enjoy a more stable retirement system, both in future contributions and overall retirement security for members.
Read the rest of this analysis here.
_______________This article republishes selections from The Impacts of Proposed Changes to Georgias Teacher Retirement System, a report by Jen Sidorova for the Reason Foundation, February 18, 2020.
Building Your Retirement Future
You and USG both contribute to the TRS, which provides a monthly lifetime benefit once you become vested. Before youre vested, you will only receive your contributions plus interest at the stated rate.
If youre a nonexempt or hourly paid employee working 20 or more hours per week, youll automatically be enrolled in the TRS Plan as of your date of hire or eligibility.
If youre an exempt or salaried employee working 20 or more hours per week, you can choose either the Optional Retirement Plan or the TRS. Your retirement selection must be made within 60 days of eligibility or you will default into the TRS plan retroactively to your date of hire or eligibility. Retirement elections are irrevocable.
Once youre enrolled, youll receive a welcome letter from TRS with instructions to visit their website to open a TRS online account and assign your beneficiary.
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Pension Cash Flow Situation Improves
The increase in employer contributions seen in the fiscal 2020 data has improved state pension plans cash flow position. Pew tracks plans operating cash flowthe difference between benefit payments going out and contributions coming inand compares that amount to the assets the plans hold, yielding the cash flow-to assets ratio. This calculation allows Pew to evaluate each pension funds level of dependence on investment performance and provides a metric for assessing plans risk of asset depletion and insolvency. A typical mature pension plan, that is, one with a significant number of participants who have retired and are collecting benefits, will have negative operating cash flow, with plan administrators expecting to make up the difference with investment returns. A ratio of -3%, for example, means that the pension plan will need investment returns of 3% or higher to offset that negative cash flow and avoid having to sell off assets to pay promised benefits.
