Like many other states across the nation, Texas faces tough decisions about the pension benefits it provides its state employees. Although Texas has one of the better-funded state pension systems, it still faces many of the same problems other states face.
Texas’s pension system is a “defined-benefit” system. These are more expensive and generous than those in the private sector; their liabilities are open-ended; and they limit public workers’ job flexibility. The private sector already has realized that defined-benefit pension plans are unsustainable, and as a result more than 80 percent already have switched to defined-contribution plans such as 401(k)s. Defined-contribution plans provide employees more control over their retirement funds and allow workers to change jobs without long vesting periods.
Texas’s two largest government pension programs have accumulated a combined unfunded liability of $28 billion. In addition, in many cases the regulators controlling pension funds have overestimated the value of future investments and the rate of return they can expect from the investments held by the pension fund. Bill King, a Houston lawyer who helped found Texans for Public Pension Reform, says recent reports claiming strong fiscal health for the Teacher Retirement System of Texas and Employees Retirement System of Texas are examples of poor accounting that vastly understates the pension funds’ real long-term viability.
This is a real concern because although long-term pension fund investment gains may have been better, recent returns have not. For example, the Texas Watchdog reports the annual return on investment for the teachers’ retirement fund over the past five years has been about 5 percent, considerably less than the average return of 8.3 percent over the past 10 years. Legislators and regulators should take it seriously when pension fund rates of return fall short of expectations; Texas’s pension system may be in even more trouble than is currently thought.
Texas should follow the lead of other public pension plans and consider lowering its assumed rates of return: Since 2008, 19 public pension plans have lowered the assumed rate of return below 8 percent, according to the National Association of State Retirement Administrators.
Both long- and short-term solutions are available. In the short term, per-year pension payouts should be capped at a sensible level, the retirement age should be raised, double-dipping should be eliminated, pension rate of return assumptions should be lowered, and workers should be required to make higher contributions. Long-term sustainability will require Texas to follow the private sector’s lead and switch workers from defined-benefit to defined-contribution systems.
The documents linked below offer additional information about pension system reform.
Battle Brewing over Texas Public Pensions
Kate Alexander of the Austin American-Statesman discusses the growing debate over the need for pension reform in Texas and the efforts by state business leaders to bring it to the legislature’s attention.
Research & Commentary: Defined Contribution vs. Defined Benefit Pensions
John Nothdurft of The Heartland Institute provides a bullet-point comparison of defined-benefit pensions and defined-contribution retirement plans.
The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform
The Reason Foundation tackles the looming crisis created by states’ continued use of defined-benefit pension plans, offering solutions to the problem and an analysis of why the current system is a disaster in the making.
The State Public Pension Crisis: A 50-State Report Card
The Heartland Institute examines problems facing public pension systems, including the enormous burdens they pose in some locations. The report ranks each state on the operation and disposition of its pension plans and suggests ways to solve states’ pension system problems.
Some GOP Leaders Say Call for State Pension Overhaul Is not Warranted
Kate Alexander of the Austin American-Statesman examines the debate among Republican legislators over whether pension reform is necessary and the possible effects of moving toward a defined-contribution system.
Pension Reformers Warn of Looming Breaking Point
Mark Lisheron of Texas Watchdog reports on efforts of pension reform advocates to warn the state about long-term problems with the state pension system and their push for reform.
Reforming Texas’s State and Local Pension Systems for the 21st Century
The Texas Public Policy Foundation recommends policies through which Texas can address its public-sector pension problems without eroding the state’s economy.
Are State Public Pensions Sustainable? Why the Federal Government Should Worry about State Pension Liabilities
Joshua D. Rauh of Northwestern University analyzes the flow of state pension benefit payments relative to asset levels and contributions. Even assuming future state contributions fund the full present value of new benefits, many state systems will run out of money in 10 to 20 years unless they improve the funding of liabilities already accrued. The expected shortfalls raise the possibility the federal government will be asked to bail out states driven to insolvency by their pension programs.
State Pension Funds Fall Off a Cliff
Barry W. Poulson and Arthur P. Hall consider different measures of historical and current funding shortfalls in state pension plans. Two case studies – the Public Employee Retirement Association of Colorado (PERA) and the Kansas Public Employee Retirement System (KPERS) – are examined in depth to explore fatal flaws that have caused funding crises in these plans.
Let Employees Control Future of Retirements
Jagadeesh Gokhale and Peter Van Doren of the Cato Institute explain why the market is best-suited to relieve the fiscal pressures caused by state pension funds.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Budget and Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].