How Resilient is TRS?
The following graphics explore how current TRS policies and contributions affect the fund’s ability to endure economic and political challenges, such as stock market downturns and economic recessions.
Current Expectations
A 30-year forecast—projected using full actuarial modeling—is the most important tool in assessing the funding and costs of a public pension plan like TRS. Every defined benefit public pension system in the country calculates benefit values and contributions using an actuarial model to observe plan solvency and overall financial health. By obtaining and compiling publicly reported TRS data, the Pension Integrity Project can provide policymakers and stakeholders with access to the same tools available to pension administrators and consultants. Most importantly to those making crucial policy decisions for the Texas retirement plan for teachers, this modeling can examine the trajectory of the system not only under best-case scenarios but also under more realistic and less-than-ideal situations.
According to the latest TRS valuation, unfunded pension benefits jumped over $6 billion in market value from 2022 to 2023, reaching a total of over $57 billion. Still, plan actuaries expect TRS to be fully funded within the state-mandated 30-year amortization window. This outcome will depend heavily on the system’s ability to achieve at least a 7% return on investments over the next 30 years.
Figure 1. Forecast of TRS Unfunded Liabilities Under 7% Annual Returns
Figure 2. Forecast of TRS Funded Ratio Under 7% Annual Returns
Quick Note: Why do the Pension Integrity Project numbers not match directly with the latest TRS numbers? Although the figures produced by the Pension Integrity Project’s TRS actuarial model are within a percentage point of those published by TRS administrators, the difference can be attributed to TRS having sole access to individual-level data and system administrators having yet to smooth in over $12 billion in unrealized losses.”
Market Volatility Exposes TRS Vulnerabilities
According to TRS actuaries, the latest figures only represent a snapshot in time, reflecting simply what has happened to the fund to date. Factoring in that experience, plan actuaries use current assumptions to forecast future fund needs. However, given TRS’ growing reliance on volatile alternative investments and market forecasts showing a low probability of achieving a 7% return over the next 10-20 years, it is important to look at how various market outcomes would impact the funding of the TRS fund. Reason Foundation's modeling examines the 30-year impact of returns coming in 1% below the plan's 7% assumed return. Using the same type of market volatility simulations included in the Dodd-Frank bank stress test, stakeholders can also see how vulnerable the TRS fund is to major recessions like those experienced in the past.
The following graph shows the compounding effect two recessions would have on TRS unfunded liabilities over the next 30 years. Unless major adjustments are made to TRS and the way it is funded by the state, the system could face major insolvency challenges if the economic conditions of the next 20 years play out similarly to the last two decades.
Figure 3. Forecast of TRS Unfunded Liabilities Under Various Return Scenarios
During their December 2023 meeting, TRS actuaries presented system trustees with data showing additional employer contributions are required to prevent the TRS unfunded liability from growing at a higher rate than revenue, otherwise known as amortization. Additional employer contributions were suggested as the solution to TRS avoiding negative amortization. Would simply increasing contributions address the systemic issues driving TRS unfunded liabilities?
Figure 4. Forecast of TRS Unfunded Liabilities Under TRS Status Quo vs Extra 1% ER Increase
A major structural issue inhibiting the resiliency of TRS is the method used to fund the system. Employer contributions are set by law, not actuarially determined like they are in the Employees Retirement System of Texas after Senate Bill 321 (2021). Plan actuaries warn this approach “puts immense pressure on the assumptions to perfectly predict the future”, adding that “most of the industry has moved away from this type of funding structure as plans that have utilized it in the past have struggled more than their peers.”
ERS Solutions to TRS Vulnerabilities
The ongoing challenges facing Teacher Retirement System of Texas and its members are nothing new to Texas policymakers. After warnings of severe underfunding in 2021, the legislature passed Senate Bill 321 (SB 321), improving the way employers paid for active and retired members of the Employees Retirement System of Texas (ERS) by ensuring annual contributions matched what actuaries say they need to fulfill promised benefits within a set amount of time. Additional annual contributions were also dedicated to prevent ERS' stubborn debt from passing to future generations.
The pension reform also provided new members of ERS access to a new cash-balance design pension plan that retains the guarantees associated with the previous benefit without the risks of runaway costs associated with the previous design.
Although the size and scope of TRS’ current challenges aren’t identical to those faced by ERS in 2021, it is helpful to see how the teachers’ plan would respond to the same ERS reforms in SB 321, especially under market volatility and recessions scenarios.
Figure 5. Forecast of TRS Unfunded Liabilities Applying a Reform like SB 321
As TRS currently stands, a recession scenario similar to the last 20 years could drive TRS to insolvency without significant injections of public funds. If policymakers were to adopt the same reforms as those applied to ERS—opening a new risk-managed tier and committing to actuarially determined employer contribution rates over time—TRS benefits would be on a much firmer footing to withstand a volatile future.
Figure 6. Forecast of Employer Contributions to TRS Applying a Reform like SB 321
If policymakers were to apply an ERS-like package of reforms to TRS, members, employers, policymakers, and taxpayers would see a dramatic change in how the system reacts to future volatility.
Instead of pushing cost increases to future generations, applying the SB 321 pension reform approach to funding TRS guarantees the money spent today would be enough to avoid passing additional pension debt burden to Texas’ future generations. Such a funding policy would also show the members of TRS that the state is committed to honoring its obligations in a way that is sustainable and doesn’t unnecessarily expose members’ expected retirement benefits to political or global investment market forces.
The data also shows that this approach would improve TRS' chances of weathering future market volatility and a new pension tier would also better serve most educators by still offering a secure benefit guarantee to people who stay in the system for short- to medium durations.
The Pension Integrity Project's "2024 Benefit Design Study" provides a deeper dive into how these different benefit designs impact employees of various career types as well as the cost to employers.