Minnesota’s TRA Pension System explained Following 2023 Legislative Session

As a public school school teacher in Minnesota, it's vitally important to understand how our teachers' retirement system (TRA) works. This post will explain what our TRA system is, how it works, the changes that have been made, and its sustainability.

"TRA provides retirement, disability and survivor benefits to Minnesota’s public educators assisting them in achieving future income security. TRA strives to provide benefits that attract and retain competent teachers who serve communities throughout the state, building a stronger education system. TRA is committed to safeguarding the financial integrity of the fund and takes pride in providing exceptional, innovative services."

Too many people view their TRA pension as their ONLY source of income during their retirement. This poor choice could lead to major problems, as we will look at in the final section of our analysis.

Our pension is a defined-benefit plan. This means that once you retire, you are guaranteed a monthly payment for the rest of your life regardless of how long you live. It can also provide an income stream for a spouse after your passing. This means that our pension is more like Social Security than it is to other retirement vehicles like a 401(k) or 403(b), which are defined-contribution plans.

Let us look at the key differences between our TRA pension and a traditional retirement plans like the 401(k) and 403(b).

Bolded cells are considered the “better” option.

As you can see, our TRA pension really does better than traditional retirement plans in most areas. We do not bear the risk of the investments. This will be pointed out later as one of the major areas of concern when it comes to plan sustainability. Fees for the plan are split among its members. One of the areas that I marked as even was for who manages the money. As our blog often points out, many teachers are not knowledgeable about money and investing. TRA means you do not have to worry about where the money is invested. For people like the TA and I that do research and look at various investment options, we would much rather decide where our money is invested. *The one area that TRA lacks in comparison to traditional plans is that they are not mobile. You cannot take your TRA with you when you leave teaching. You may request a refund of your contributions, but here is the thing. NEVER, EVER do that unless you leave teaching within the first 5 years. The reason is that you ONLY get back YOUR contributions. You do NOT get the money that the school has contributed to your retirement. This means you take an instant 50% LOSS on your money if you take the refund! Your other option is to leave your money with TRA until you are ready to retire. This will mean that you will receive a pension payment when you declare your retirement. The last two options are also strongly on the side of TRA because you know exactly what your benefit is and how long it will last.

How is TRA funded?

TRA is funded both by you as a member and your employer. As I mentioned earlier, your contribution is automatically deducted from your paycheck and you CANNOT opt out of your contributions. Your contribution amount is also calculated based on your pre-tax income, so keep that in mind when you receive extra money in your paycheck from extra duty.

TRA benefits are mostly covered by growth in investments. This is also true of traditional 401(k) and 403(b) plans. This works true to form when the market is going up, but there are periods of time when it does not.

When is Retirement?

You are probably thinking, “OK Professor, this info is great and all, but I want to know when I can retire.” You are eligible to collect retirement at age 55 if you are “vested”. Most of you reading this are vested after 3 years. Now, you might be eligible to retire at 55, but you will be paying a STEEP penalty for this early retirement. Let us look at the popular retirement options and the penalties for retiring early.

We will start by first defining what normal retirement age (NRA) is. According to TRA, teachers hired after June 30, 1989 have an NRA of 65.

"WHAT!?!? I HAVE TO TEACH UNTIL I’M 65!"

Calm down. There are some exceptions. The first one is well known. It is the “Rule of 90”. This “Rule of 90” means that you qualify for full retirement when you add your age and years of experience together and they equal 90 or greater. This rule only works for those people that were hired before June 30, 1989. This Rule of 90 was removed many years ago because it puts a lot of stress on the pension fund and would be unsustainable for future retirees.

So what does it mean if you do not qualify for Rule of 90? Do not worry; a new rule was put in place a few years ago for the rest of us called 62/30. This rule means that you qualify for a “less” penalized retirement if you are 62 years old and have 30 or more years of service credit. Each year of service credit is one academic year. Now this 62/30 does not give a “full” retirement, but you would only have a penalty of 14% to your benefit. If you retired at 62 and had less than 30 years of service credit, you would have a 28% reduction, so it is important to hit that 30 years of credit.

What if I do want to retire at 55? If you retire at 55, your monthly benefit will be reduced by 65%! If you really feel like you need to leave teaching, you would be better off delaying your benefit until 62 to reduce that penalty.

So How Is My Benefit Calculated?

This section is where our TRA plan differs greatly from your traditional retirement plans. With traditional plans, your monthly “withdrawal” from your plan would greatly depend on how much is in your account. In addition, nobody knows exactly how long they are going to live, so it is difficult to choose a correct withdrawal rate. Top that with a sometimes volatile market return rate, and it is a recipe for a stressful retirement.

Now that you know where the money comes from, most people want to know how they calculate the benefit amount.

Your monthly benefit is calculated by multiplying your years of service by the average of your High-5 salary and your formula multiplier.

So let us work one of these out using yours truly as an example since I AM going to retire at 62.

Here is how the numbers will work out for me.

Years of Service – 38

High Five (estimate) - $72,000

Formula Multiplier - 1.7% x 8 years (any years pre-2006)

Formula Multiplier – 1.9% x 30 years (any years post-2006)

Total Multiplier = 70.6%

Penalty – 14% of 70.6% = 10.2%. 

70.6% - 10.2% = 60.4% of my high five.

This works out to $43,488/year or $3,624/month.

These numbers are estimated, but give you a good idea of what I can expect upon retiring at age 62. The best thing is that there is a great retirement calculator when you log into your account on the TRA website that will give allow you to create a variety of estimates depending on different retirement dates that you can enter.

Future of TRA

Over the last few years, public pensions have been under attack. The private sector has seen pensions all but disappear, and instead of fighting to get them back, they would rather see them stripped from the public sector. In fairness to the public, some of the promises and benefits that have been given to public pensions have come at a cost that is forcing some states to make up the shortfalls in funding.

Remember the point about risk in our TRA pension? That risk is borne by the fund itself. If the market returns do not meet the “expected” return that the actuaries use to project funding, the fund will be “short” of its goal. Since these benefits were negotiated in “good faith”, the government is required to make sure that the terms are met. This is when you hear of states like Illinois that is talking about a $133.5 billion deficit for their public pension. John Q. Public reads this and sees their tax dollars going to public employee pension when they lost theirs, and they want to see change.

So what does it mean for you? When looking at a pension fund, the important thing to look at is the accrued funding liability ratio. This is a fancy way of saying what percent of the money is there for the future. Currently, MN’s percent is 76.9%. This is not great, so changes were made in 2018 that will improve the future of TRA. This information was taken from the 2018 Actuarial report. Just a little light reading. If you’re aren’t a little weird like me and like looking at these numbers, just take a look at the chart below to see these changes.

The changes enacted raise the funding percent to over 100% by the end of 30 years. They were also important to stay ahead of groups like ALEC. ALEC is the group that is behind much of the legislation pushed at the state level for eliminating defined-benefit pensions. Surprisingly, I read their thoughts on defined-benefit pensions and their proposal to fix them and found they are for eliminating them but keeping the promised benefits. You can read their report here.

Conclusion

TRA is a tremendous benefit that we have. It is also constantly under attack from outside groups, which makes it extremely important that you understand the pros and cons of all the current parts of the plan. Undoubtedly, it will change as you move through your teaching years. Do NOT count solely on your TRA to fund your retirement! You must plan and use your other retirement vehicles, 403(b), 457(b), to augment your retirement benefits. Your future self will thank you!

If you have any comments or any questions about my explanation, please let them below.

KEEP STACKIN!