TRA, Minnesota’s Defined Benefit (DB) retirement program for teachers, is squeezed by an average two-year increase in teacher life expectancy and expectations of lowered investment returns.
MREA supports maintaining a stable DB retirement plan through shared responsibility and supports the Governor’s proposed investment in TRA.
Changing Life Expectancy
The 2015 actuarial experience study for TRA revealed that female teachers’ life expectancy rose four years and male teachers six months, averaging to a two-year gain in life expectancy. A female teacher age 65 is expected on average to live to 90. This additional four years of retirement pay was unexpected.
Lower Investment Returns
Simultaneously, the expected investment returns for TRA and all retirement plans have been trending downward. TRA dropped from 8.5 percent to 8 percent. However, Governor Dayton’s Blue Ribbon Panel on Pension Reform has called for a 7.5 percent expected return assumption in the December 2016 report.
Urgency and Impact
The urgency of this fix is the combined impact of increased life expectancy and a 7.5 percent expected investment return. Ideally, pension plans are 100 percent funded. The TRA proposed fix with an 8.0 percent return gets it to 89 percent funded by 2045. With a 7.5 percent return, it stays level at 70 percent funded. Without the fix, it is projected to drop to an unsustainable 37 percent funded ratio.
Addressing the Changes
TRA has proposed to the Legislative Commission on Pensions and Retirement (LCPR) the following fix.
- Retirees and Active Teachers: Reduce COLA by one percentage point to from 1 percent for 5 years, 1.5 percent thereafter, and eliminate 2.5 percent COLA trigger.
- Employers: Increase contribution rate two percentage points to 9.5 percent (phased over 4 years).
- State: Offset increased employer contributions through pension adjustment mechanism in school funding formula. The Governor included the first two years of this phased increase in his budget.
Future of Minnesota Teachers
DB retirement is an important factor in both teacher recruitment and retention, according to data presented by TRA:
Recruitment: Among workers under age 40, 63 percent say offer of defined benefit (DB) pension is important in accepting the job, up from 28 percent just two years before. (Towers Watson, 2012)
Retention: Three-fourths of new hires say DB pension is compelling reason to stay on the job. Teacher effectiveness and productivity improve with experience. (Towers Watson, 2012 and National Bureau of Economic Research, 2006; Milanowski and Odden, 2007)
Why support this proposal?
MREA supports this proposal for the reasons articulated by testifiers at the LCPR meeting Feb 14.
Rodney Rowe of Education Minnesota testified that half of teachers leave the profession in the first five years, so good benefits are important. EdMN supports TRA proposal because it is balanced.
Gary Amoroso, executive director of the Minnesota Association of School Administrators, stressed that state funding to offset increased employer costs is important, especially because previous TRA contribution increases were absorbed by school districts. Amoroso pointed out that the governor’s pension proposal only funds the contribution increases for two years and additional funding will be needed in the third and fourth years.
Scott Croonquist, executive director of the Association of Metropolitan School Districts, shared that the school aid pension adjustment mechanism is efficient and equitable because it will reimburse districts for their actual increased costs.
Grace Keliher of the Minnesota School Boards Association backed up the testimony of Amoroso and Croonquist and credited Gov. Mark Dayton for recognizing the need to help school districts cover the increased pension costs. Keliher said she supports including a mechanism in TRA’s bill that covers the entire 2 percent employer increase.
Not all observers are in favor of DB retirement plans. Kim Crockett of the Center of the American Experiment has been an outspoken advocate for walking away from DB retirement plans and replacing DB plans with Defined Contribution plans. Learn more I told you so? Crockett update on Public Pensions.