How Does the Teacher Retirement System Work?
American public schools currently employ roughly 3.2 million full-time teachers, and about 2% of those retire annually. That means around 64,000 teachers go into permanent summer break every year.
How Does Retirement Work for Educators?
Teachers and other education-related workers at the state and municipal levels are often eligible to participate in a retirement planning program called the Teacher Retirement System (TRS). The TRS is usually a state or locally run organization that provides retirement benefits for teachers.
Because these systems are set up at the state and local levels, they vary significantly from state to state. However, most retirement programs using the TRS name are qualified retirement plans under the Employee Retirement Income Security Act (ERISA) code section 401(a). The TRS typically offers a defined benefit pension plan, which guarantees a monthly benefit based on plan-specific features.
Teachers might also be offered other retirement benefits under their specific plan. In addition to the TRS pension plan, many teachers are eligible for a tax-deferred annuity program under code section 403(b) of the Internal Revenue Code (IRC). A 403(b) plan operates more like a 401(k) salary reduction plan, which allows participants to defer some of their own salaries into the plan, offering an effective way for teachers to save in addition to their TRS pension plan.
TRS Plans Vary by State
Because the TRS varies across the country—in fact, it could between states, counties or even your district—it is important to review your local plan. Plans change over time, which means teachers who started working at an earlier date could be under one version while employees that started at a later date are subject to a different version.
For example, in New York, there are six different tiers of membership based on the date of enrollment. The difference between tiers determines when you can claim benefits, how much you receive, inflation protections, and how fast your benefits accrue. As a result, New York teachers experience significant differences between tiers and across plans.
The benefit in a TRS is usually based on a few factors. Typically, the plan takes into account a pension factor that is multiplied by your years of service in the plan, which is then multiplied by your final average salary. In New York, your pension factor can be adjusted for your age if you retire before you are 62.
Pension Factor = Years of Service Credit x Your Program's Percentage
Typical TRS Benefit
Typical TRS Benefit = Pension Factor x Years of Service in Plan x Final Average Salary
Final average salary or compensation is not typically all of your years added up but rather some other average, for example, your highest three years, highest three consecutive years, highest three of your last five years, or highest five years. Again, this calculation can vary by plan. Plans also typically have a cap on years of service and some restrictions on compensation that can be considered.
Pros and Cons
What We Like
Participant not responsible for investment risk, plan design, management and funding.
Guaranteed benefit amount at retirement.
Stock market fluctuation does not impact benefit.
Many states allow you to transfer your plan from one state pension plan to another in-state pension plan.
What We Don't Like
Benefits rise faster toward the end of your career.
Many TRS plans are vastly underfunded.
Some teachers in a TRS are exempt from participating in Social Security.
TRS can provide great retirement plans for participants as the investment risk, plan design, management, and funding do not fall on the participant. Additionally, the plan guarantees a benefit amount at retirement, which is one of the main benefits of defined benefit pension plans.
As such, when the stock market fluctuates, it does not impact the individual’s TRS benefit, even though it impacts the underlying funding of the plan. The individual is not required to pick investments, a deferral amount, or any other enrollment feature. This ease in participation gets more people into the system and removes some of the risks of having to handle these decisions alone.
Another benefit of the TRS plan is that in many states you can transfer your plan from one state pension plan to another in-state pension plan. This varies by state and by plan but can be a great feature if you switch jobs within the state pension system. However, even though you may be able to transfer from plan to plan, a transfer could still impact your benefits, so this must always be reviewed before making a decision.
While TRS benefits are secure and can provide a great source of income in retirement, they do come with downsides. Most defined benefit plans see benefits rise faster toward the end of your career, making them more beneficial the longer you stay with the employer.
Additionally, while TRS plans are some of the largest public plans in existence, many are vastly underfunded. This represents a real risk to the future and sustainability of the plans.
On top of that, depending on the state, some teachers in a TRS are exempt from participating in Social Security. The clear upside here is that you don’t have to pay into Social Security, but you also will not be accumulating your own Social Security benefits.
If you are in an exempt TRS plan, your pension payout could also impact Social Security spousal benefits, survivor benefits, and even Social Security benefits you have earned from other employment.
Final TRS Thoughts
If you are in a TRS or joining one soon, make sure you understand your benefits, the funding status, your distribution options at retirement, and how your plan works. Variances may exist across your state, district, or even within your particular TRS, so find out how you can make the most of your plan.