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The Teachers’ Retirement System (TRS) was created in 1943 by the Georgia Legislature as a defined benefit plan that pays benefits based on a formula that takes into account a teacher’s length of service and his or her highest two consecutive years of pay. Unlike a 401(k) or many other defined contribution pension plans, the State of Georgia guarantees that TRS retirees will continue to receive these benefits for life.
At this time, TRS manages retirement accounts for approximately 272,000 active employees, pays benefits to approximately 75,000 retirees and survivors and has a retiree payroll of about $2.2 billion a year.
According to current board rules, each year teachers also receive a 3 percent cost of living increase (COLA). From 1943 to 1969 there was no mandatory COLA and granted on an “ad-hoc” basis. The mandatory COLA is added to the base retirement and is compounded. Recently, the TRS board has proposed to make the COLA optional rather than mandatory. The board will vote on this proposal at the Nov. 19 board meeting. This column provides some background on the TRS system.
Contributions to TRS come from the employee and the employers, and in this case the employers are the state and the local school system. The earnings of the fund are also a key part of the assets.
The employers’ contributions have fluctuated over 28 years from a high of 13.63 percent in 1989-1990 to a low of 9.24 percent in 2002-2006. Currently the employer rate is 9.28 percent; however, the board is proposing to increase this rate to 9.74 percent in the coming year.
Between 1980 and 1994, eligible employees contributed 6 percent of their salary to the retirement system. In 1995, the employee contribution rate was dropped to 5 percent, where it is today. The board is also proposing to increase this contribution rate to 5.25 percent this coming year.
Currently, TRS is actuarially sound. A 2008 audit by KPMG found that the TRS is 94.7 percent fully funded. The Government Accounting Office study of state pension plans notes that most experts consider 80 percent fully funded to be a well-funded plan. Under the Pension Protection Act of 2006, private sector pension plans are required to meet an 80 percent funded ratio by the federal government in order to have their pensions guaranteed by the Pension Benefit Guarantee Corporation.
History of cost of living adjustments for retired teachers
In 1969, the Legislature authorized TRS to provide cost of living adjustments (COLAs) to retirees. The current language in Board Rules states that the Consumer Price Index is determined twice a year and if the Index has increased in the period, retirement benefit would be increased by 1.5 percent each six months. Actually, the rules also provide for the retirement benefit to be decreased by up to 1.5 percent if the CPI decreased by up to 2.5 percent and mandates the decrease if there is a CPI decrease exceeding 2.5 percent.
At that time, the TRS Board of Trustees adopted an administrative rule that resulted in 1.5 percent COLAs being granted every six months on Jan. 1 and July 1. The Board also adopted a policy of “prefunding” the COLA, or ensuring that employee and employer contributions were sufficient to cover an annual COLA over time. So, there is a case to be made on the pre-funding issue.
By way of contrast, the Employees Retirement System (ERS) for most state employees does not have a mandatory COLA nor did this plan pre-fund the COLA through employee and employer contributions.
In its Sept. 24 meeting the TRS Board proposed amending its long-standing administrative rule about COLAs.
Previously, the rule read that “… retirement benefits would be adjusted by 1.5 percent.” The new rule would read that the “... retirement benefits may be adjusted up to a maximum of 1.5 percent.” (emphasis added) This proposed change would give the board leeway in adjusting retirement benefits and not lock the board into the 1.5 percent adjustments.
Some concerns have been raised that the original actuarial assumptions made by TRS might prove to be too optimistic. In particular, TRS has based its projections on a 7.5 percent annual growth rate as well as assumptions about rate and age of retirement, years on retirement, and salary levels that might have been too optimistic. In fiscal year 2008 for instance, the TRS funds were at -3.5 percent rather than a positive 7.5 percent. As we all know from looking at the stock market, this year also may be financially difficult for the system. The board must weigh these issues in making its decision about the employer and employee contributions, as well as whether or not the state should adjust the COLA requirements.
Members of the TRS have every reason to be confident of the soundness of the fund and in its operation. The decision concerning COLAs is, however, in the hands of the TRS Retirement Trustees and is not a legislative decision at this time.