Teachers Retirement System of Georgia posts strong investment returns, still needs major reforms

Recent investment gains—a whopping 14.5% investment return for the fiscal year ending June 30, 2024—for the Teachers Retirement System of Georgia (TRS) are a promising sign for reducing the pension plan’s long-standing funding shortfalls, especially after strong investment returns in 2023 as well.

Despite these recent investment successes in building the system’s assets, Georgia’s teacher pension is not out of the woods and still poses a major risk of unexpected runaway costs. The fund previously experienced investment returns substantially below its expectations in 2016 (1.4%) and 2022 (-12.8%), and not only is there no guarantee major investment losses won’t happen again, but failure to prepare for that possibility places significant risks on tomorrow’s taxpayers.

The Teachers Retirement System has gone through decades of growing pension debt. TRS now has $27.7 billion in debt and is far from reaching full funding. In addition, recent stock market volatility shows how things can quickly change for public pension systems.

Policymakers must grapple with these volatile market swings while seeking to secure pension promises made to teachers without passing major unnecessary costs on to future taxpayers. Ongoing challenges with pulling TRS back to full funding suggest that lawmakers still need to consider major reforms, particularly a more robust debt payment plan and a modernization of benefits, to improve the financial state of TRS.

The funded ratio of the plan was 78.2% as of June 30, 2023, according to the latest available valuation​. A funded ratio of 100% means the pension plan has sufficient assets to cover all its liabilities. Being below this mark indicates that the pension system does not have enough assets to meet all its future obligations, posing a risk to the financial security of retirees. Ever since the Great Recession, TRS has maintained funding below 80% (save a few brief periods barely above that level). According to the latest reporting, the system is on track to pay off existing pension debt within 22 years, but success will depend heavily on achieving lofty investment goals.

The assumed rate of return on investments used by Georgia TRS (currently 6.9%) is overly optimistic and leaves the system vulnerable to market volatility. Lowering this rate to a more conservative figure will reduce the risk of future deficits and ensure that the fund remains solvent even in less favorable economic conditions. The assumed rate of return has already been reduced from 7.50% to 7.25% effective with the June 30, 2018 valuation, and then from 7.25% to 6.90% effective with the June 30, 2021 valuation. It is critical to consider lowering it further to match the 6% investment return rate that most market experts are forecasting for the next 10-to-15 years. While lowering the assumed rate of return necessitates higher annual contributions from taxpayers and its members to maintain the current funding trajectory, it also ensures a more stable financial future for the pension fund.

The plan uses a schedule to pay off any new debt within 25 years. This amortization approach is too lengthy and exposes the system to prolonged financial risk. The Society of Actuaries recommends a shorter amortization period of 15-20 years to more effectively manage pension debt. A shorter amortization schedule would help mitigate interest costs over time and reduce the likelihood of accumulating further unfunded liabilities, crucial for the fiscal health of the fund.

Shortening the amortization schedule for the pension fund’s liabilities will also help pay off the debt more quickly. The total long-term cost of amortizing both legacy and any future unfunded liabilities would be lower, mainly because pension debt would not accumulate as much interest if it were paid off sooner.

TRS also faces a major crisis in providing adequate retirement benefits to its members. With a lengthy vesting requirement of 10 years, only a small segment of teachers are earning a pension benefit, and the majority are falling short of building adequate retirement savings during their time in the system. According to retention rates expected by the system’s actuaries, fewer than 35% of new hires will reach the 10-year requirement, which means two-thirds of teachers will walk away with only their contributions and no help on their retirement from their employers.

Even those teachers who reach the lofty vesting requirement but leave for other opportunities shortly thereafter will see their pension benefits greatly reduced by inflation.

With the modern workforce’s increasingly mobile tendencies, policymakers need to reevaluate how well a traditional pension benefit fits the needs of teachers. The Employees’ Retirement System of Georgia (ERSGA)—the state’s plan for other government workers—underwent reform in 2009 that established a new modernized tier of benefits for new hires that mixed individualized 401(k)-like benefits with pension benefits. This could be a valuable template to follow for making a TRS that works for most educators, not just the few who stay for their entire careers.

The impacts of stock market volatility experienced by Georgia’s teacher pension should concern policymakers. The ongoing struggle to reduce public pension debt suggests that major reforms are needed.

Further lowering TRS’ assumed rate of return and reducing the amortization schedule are critical steps in securing the financial future of Georgia’s teachers and the state’s fiscal health.

Seeing that the current pension offered to teachers is a poor match for the vast majority of newly hired educators, Georgia lawmakers should explore options to modernize the Teachers Retirement System, similar to that which was done for the state’s other major retirement system for public workers.

A version of this column first appeared at GeorgiaPolicy.org.