Why rising inflation is hitting retired Texas teachers especially hard

The state’s Teacher Retirement System does not adjust its pension payments for inflation.

By Cristela JonesJune 13, 2022 3:47 pm,

While inflation is hurting the wallets of many, retired Texas teachers are getting hit especially hard.

The Teacher Retirement System, the state’s pension program for educators, does not adjust its pension payments for inflation, which can fluctuate the purchasing power of retired teachers. Dennis Jansen, a Texas A&M economics professor, joined Texas Standard to share more about his research on TRS and how inflation – the cruelest tax – is affecting retired teachers in the state. Listen to the interview above or read more in the transcript below.

This transcript has been edited lightly for clarity:

Texas Standard: Many Texans rely on pension systems. What is it that turned your attention to teachers?

Dennis Jansen: I have been engaged in some research on education and related to teachers for quite some time, and also some research on Texas pensions, which, as you may know, are somewhat underfunded. And so I had been familiar with the TRS system, and I knew that it was not indexed for inflation.

Why isn’t the Teacher Retirement System indexed for inflation?

I don’t think I can really answer why, but I can tell you that it does have provisions for special one-time increases or cost of living, but those are at the discretion of the state Legislature.

One of the reasons I ask is because I wonder if those who do the bean-counting there realize that, well, one way to deal with this underfunding issue might be to limit those adjustments. I mean, is that a way that some of those who tend the books try to keep costs down for themselves?

That may well be behind the decision not to index the pension payments, but this has not been a recent decision. These pension payments have not been indexed for decades. I mean, as long as I have looked at, they’re not indexed.

Well, let’s talk about what effect this is having on retired teachers. You write about a San Antonio ISD teacher retiring at 62 who worked 37 years in the classroom. Tell us about how inflation might affect that person.

Right. So that was an example, just to illustrate the point. But this retiree, if she retired at 62, she would have about 24 years of expected lifetime left – of course, that varies by the individual – and she would receive $60,300 for the rest of her life. But that’s in nominal dollars. You could expect, perhaps, a 2 percent inflation rate since the Federal Reserve System in the U.S. has announced that that’s its target. But when the inflation rate is above 2 percent and it’s rather unexpectedly above 2 percent, it basically just reduces, percentage by percentage point, the teacher’s purchasing power.

We’re way above 2 percent right now, professor, as you well know; we just had new numbers on inflation released on Friday. What’s this doing as a practical matter for retirees who are depending on those teachers’ payments?

Well, I believe it’s making their life much more difficult. When you have the [Consumer Price Index] inflation rate running between 8 and 9 percent a year, that’s like an 8 or 9 percent reduction in our hypothetical teacher’s $60,000 a year. That’s like saying we cut your payments by $5,000 or $6,000.

Is inflation affecting newer retired teachers the same way as those who are many years into retirement? Or does this affect everybody pretty much the same?

It affects everyone in retirement, pretty much the same. The only difference is that as you approach the end of your lifespan, you have fewer years to face that reduced purchasing power. So a newer teacher faces, based on this year’s CPI increase, an 8 percent cut in her lifetime earnings for the rest of her life. That doesn’t get made up in future years. You’ve just received an 8 percent cut in your pension and your purchasing power of your pension. And that goes on for the entire – in our hypothetical case – the entire 24 years. Moreover, if the inflation rate continues above 2 percent next year, you’ll have the same issue going on.

What does this mean for those who are approaching retirement? Does this change the calculus for them? Maybe they need to try to continue working past retirement, the nominal retirement age, or what?

I think if I were advising a teacher, I would think you’d want to wait until A) your wages are catching up with inflation, and B) the inflation rate itself has declined a bit. So, even if a teacher’s planning to retire this summer, for example, they haven’t received a 9 percent increase in their wages. And so they need to receive that for the final three or five years of working. And so until they receive that increase in wages to restore the purchasing power of their current income, retiring is still going to be faced with the reduced purchasing power based on their low wages relative to the inflation rate that they earned this year.

Is there a solution here? Institutionally or perhaps from the government level when we’re talking about policy, is there a way of of addressing this issue? 

Well, there’s no there’s no free lunches, economists are wont to say, and I think in this case, the institutional or political solution would be to either have the one-time increases in the cost of living increases in pension payments as allowed for in the TRS institution. But that’s not free. And the taxpayers of Texas will pay for that. On an individual level, it’s also expensive. You can buy if you can get a lump sum payout of some, you can purchase partially indexed annuity, but that’s also expensive. 

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