The MTRS has prepared, as a companion to the Annual Statement of the Financial Condition, the following questions and answers regarding system funding and debt, the system’s current health and long-term sustainability, and what it means to active members and retirees.
How is my MTRS benefit funded?
The funding for your MTRS benefit comes from three sources:
- Employee contributions: your retirement contributions to the MTRS during your membership;
- State (“Employer”) contributions: the Commonwealth makes an annual appropriation from tax revenues to help finance public employee retirement benefits. Unlike in most other states, local school district employers do not contribute toward their teachers’ retirement benefits. Instead, for purposes of retirement benefits, the Commonwealth is the “employer” for public school teachers.
- Investment earnings: the earnings on the Pension Reserves Investment Trust (PRIT) Fund, which holds the assets of the system and is managed by the Pension Reserves Investment Management (PRIM) Board.
Note: MTRS members who leave service before retirement and take a refund from the system only receive their own employee contributions and eligible interest; they receive no employer contributions.
How healthy is our system?
One statistical measure of the financial health of a pension system is the funded ratio, which is simply the plan’s assets divided by its liabilities (the cost of all current and future benefits earned by its active and retired members). A “fully funded” system has a funded ratio of 100%. While retirement systems strive to be fully funded, a “financially healthy” system generally maintains a funded ratio of at least 70-80%.
In 2000, the MTRS’s funded ratio reached its historical high of 83.3%. However, as a result of past state funding shortfalls and more recent increases in plan liabilities, the funded ratio of the MTRS is currently 51.7% ($27.85B in assets/$53.86B in liabilities = 51.7%).
Note: There have been several demographic and investment rate of return assumption changes since 2009. These changes have made the system’s assumptions more conservative, which will be a net positive for the system in the long run. However, it is important to acknowledge that these changes have increased the system’s unfunded actuarial liability (UAL) by over $7 billion. Had we continued to use the 2009 assumptions, the MTRS funded ratio would be 60.5%.
How did we get here?
From the inception of the state and teachers’ retirement systems in 1911 and 1914, respectively, until 1988, retirement benefits were not pre-funded. They were solely financed through current active member contributions, with ad-hoc pay-as-you-go payments from the Commonwealth. By 1988, with the retirement of the Baby Boomer generation on the horizon, it became abundantly clear that this type of funding was unsustainable and put the retirement security of teachers and other public employees, who are not covered by Social Security, at significant risk.
In response, the Commonwealth established a new funding policy that would finance benefits as they were being earned. This policy continued employee contributions and added new employer contributions paid by the Commonwealth. These annual contributions were designed not only to fully fund the benefits earned by all members in the current year (the “normal cost”), but also to include an installment payment on the nearly 11 billion dollars ($11B) in historical debt that had accrued during the years before 1988 (the “unfunded actuarial liability” or “UAL”).
What other factors are contributing to the system debt?
Over the past 20 years, the costs of current and future benefits as determined by the actuary (“system liabilities”) have increased due to a number of factors, including:
- New mortality tables
Over the past decade, there have been improvements in the tools that actuaries use to predict life expectancies, and these tools have shown that retired teachers are actually living longer than previously thought. In order to have sufficient funds available to pay additional benefits to retirees with longer lifespans, more money must be contributed to the system up front.
- Decreases in assumed rate of return
Each year, the actuary makes an assumption about the investment return that the pension fund assets will earn over time. In 2000, the actuary assumed an annual return of 8.25%, but that figure has been decreasing due to industry trends toward lower long-term market projections, and is currently 7.25%. Since the investment return on system assets is one of only three sources of funding benefits, when the predicted return is reduced, the money has to be made up from either employee (member) or employer (Commonwealth) contributions. As current teachers are already paying 11% of their salaries toward their benefits, the Commonwealth is responsible for making up this additional cost.
- Market downturns
While some market fluctuations are expected, when actual market returns are significantly lower than the returns expected by the actuary (such as the market crash in 2008), more money has to be contributed to the system to stay on the funding schedule.
- Benefit enhancements
The RetirementPlus benefit tier passed in 2001 allows teachers to retire earlier, and collect full benefits for about three to four more years than they otherwise would have. To cover the cost of these additional benefits, more money must be deposited in the pension fund. Part of this is covered by the 11% contributions paid by the members, but there is also an additional cost to the Commonwealth.
Is the Commonwealth making progress paying down the debt?
In recent years, the Governor and Legislature (the plan sponsors) have supported substantial increases (8.94 – 10% per year) in the state’s annual pension contribution to make up for years when the Commonwealth’s payments were insufficient. With the goal of eliminating historical debt within a reasonable time frame and securing our members’ benefits, the MTRS Board consistently advocates for increases in pension funding, as well as deposits to the PRIT fund when there is excess revenue. For the next three years, the Governor has sent a schedule to the Legislature authorizing annual pension funding increases of 9.63%. These increases, combined with positive realizations of other assumptions, will help raise the funded ratio of the MTRS over time.
What does this mean to me? Is my retirement benefit guaranteed?
Yes. While the Legislature can change certain plan provisions, MTRS retirees’ monthly benefits are a contractual obligation of the Commonwealth pursuant to M.G.L. c. 32, and payable for their lifetime. MTRS is a “defined benefit” pension plan, which means that the benefits are not impacted by market fluctuations, but rather, are determined according to a set formula based on age, length of service and final average salary.
Should I be worried? What can I do?
Funding progress is being made, and the Commonwealth’s current leadership is committed to providing teachers with a secure retirement. However, it is very important that you stay current with news on the funding progress and changes in the political landscape. Future Governors and Legislators need to maintain the commitment to paying down the pension debt in a timely manner and achieving full funding for the system.
If you have any questions or concerns, please contact us via phone: 617-679-6877 or email: GenInfo@trb.state.ma.us