Georgia’s pension plans pose financial risks to public employees, taxpayers

Georgia’s largest public pension plans, the Employees’ Retirement System (ERS) and the Teachers Retirement System of Georgia (TRS), have seen a year of exceptionally high investment returns: 19.4% and 25.08% gains respectively.

This investment performance is in stark contrast with last year when ERS had a negative 3.6% return (a loss) and TRS saw a modest 2.9% gain. The high investment returns are not unique to Georgia: Nationally, public pension plans have averaged investment returns of 27% for the fiscal year 2021.

The high returns are great news for ERS, a multi-tier public pension plan that enrolls all new employees to a hybrid defined-benefit (pension) and 401(k) plan. The structure of the hybrid benefit provides accountability and manages the burden that unfunded liabilities have on government budgets and taxpayers. According to the latest reporting, ERS now has $2.3 billion in unfunded liabilities and is 87.6% funded, a significant improvement from the previous year when it had $4.2 billion in unfunded liabilities and just 76.2% funded.

Strong investment returns are great news for Georgia’s teachers as well. Unfortunately, a year of good returns will hardly be the long-awaited salvation for TRS, which is the pension plan serving the state’s educators. As pointed out in a previous analysis, the teachers’ retirement plan faces several significant challenges that will require more than a single year of great investment returns to fix.

Going forward, it should not be assumed that Georgia’s pension plans’ high investment returns will continue. Experts predict the average investment return for public pension systems over the next few decades is likely to be less than TRS’ current target of 7.25%. Regardless of the high investment returns now, TRS should quickly lower this investment return assumption, which is above the national average of 7.0%. One year of excellent returns will not change the fact that TRS is most likely underestimating its unfunded liabilities.

Before the COVID-19 pandemic, there was a discussion of possible reforms to TRS. Among the proposals discussed were lowering assumed investment return rate assumptions, shortening the amortization schedule, and creating a new benefit tier.

The Pension Integrity Project at Reason Foundation pointed out that lowering the return rate assumption can improve a public pension system’s ability to keep promises by reducing the risk of insolvency and improving the long-term predictability of contribution rates. Shortening the time frame to pay off pension debt, in turn, can reduce the total long-term costs of the pension system. Creating a new benefit tier would not result in any changes to the benefits of current participants or increase state contributions, and it could lower the overall risk of plans’ underperformance.

A single year, or even several years, of exceptionally high investment returns, would be welcome news for TRS. Even a streak of high returns, however, will not change the harsh truth that TRS and many other public pension plans still face significant funding risks and unfunded liabilities going forward.

Georgia’s policymakers need to address these risks to protect taxpayers, employees, and retirees. Absent meaningful pension reforms to reduce financial risk and improve the solvency of the teachers’ retirement plan, the state will increasingly have to divert money away from other public priorities, such as K-12 education and infrastructure repairs, to pay its rising pension costs.

A version of this column was originally published by the Georgia Public Policy Foundation.