The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
Texas's pension system is based on a benefit formula that is not neutral, meaning that each year of work does not accrue pension wealth in a uniform way until teachers reach conventional retirement age, such as that associated with Social Security.
Teachers' retirement wealth is determined by their monthly payments and the length of time they expect to receive those payments. Monthly payments are usually calculated as final average salary multiplied by years of service multiplied by a set multiplier (such as 1.5). Higher salary, more years of service or a greater multiplier increases monthly payments and results in greater pension wealth. Earlier retirement eligibility with unreduced benefits also increases pension wealth, because more payments will be received.
To qualify as neutral, a pension formula must utilize a constant benefit multiplier and an eligibility timetable based solely on age, rather than years of service. Basing eligibility for retirement on years of service creates unnecessary and often unfair peaks in pension wealth, while allowing unreduced retirement at a young age creates incentives to retire early. Plans that change their multipliers for various years of service do not value each year of teaching equally. Therefore, plans with a constant multiplier and that base retirement on an age in line with Social Security are likely to create the most uniform accrual of wealth.
Texas's pension plan is commended for utilizing a constant benefit multiplier of 2.3 percent; however, teachers may retire at age 60 if they qualify for the "Rule of 80," meaning age plus years of service equal 80, while other vested teachers may not retire with unreduced benefits until age 65. Therefore, teachers who began their careers by age 40 can reach the "Rule of 80" with 20 years of service by age 60, entitling them to five additional years of unreduced retirement benefits beyond what other teachers would receive who may not retire until age 65. These provisions, along with the state's early retirement with reduced benefits based on years of service, may encourage effective teachers to retire earlier than they may otherwise, and they fail to treat equally those teachers who enter the system at a later age and give the same amount of service.
End retirement eligibility based on years of service.
Texas should change its practice of allowing teachers whose age and years of service equal 80 to retire at age 60 with full benefits. If retirement at an earlier age is offered to some teachers, benefits should be reduced accordingly to compensate for the longer duration they will be awarded.
Align eligibility for retirement with unreduced benefits with Social Security retirement age.
Texas allows teachers to retire before conventional retirement age. As life expectancies continue to increase, teachers may draw out of the system for many more years than they contributed. This is not compatible with a financially sustainable system (see Goal 4-H).
The Teacher Retirement System of Texas did not respond to repeated requests to review NCTQ's analyses related to teacher pensions.