January 31, 2020
As a former teacher, I’m honored to have the opportunity to serve many teachers as clients. From public school teachers, to private school teachers, and retired teachers of all kinds, serving those who serve our children is quite fulfilling.
Specifically, for those who serve in the Georgia public school system, there is a fantastic retirement perk that creates a financial reward, which I believe, is greatly underestimated. And that retirement perk is found through a combination of the state of Georgia pension plan, called Teacher’s Retirement System of Georgia (TRS), and the state of Georgia health insurance retirement plan.
The prevailing rhetoric is that the field of education does not pay well. But I completely disagree with that viewpoint. Although it is true that the salary of an educator is not financially lucrative, there are perks to that profession that make it compete with executive level compensation of some businesses. I’ll take a moment to explain. Because otherwise, a current teacher who reads this, might feel compelled to pick up the apple off his or her desk and throw it in my direction.
The Georgia public school system provides a generous three-fold compensation package. The first part occurs during the working years. The second part occurs during retirement. And the third part occurs as a survivorship benefit after death. Through their working years, Georgia public school employees enjoy excellent state-subsidized health insurance. And for an added cost, that health insurance is extended to their families. If you are reading this and disagree with this statement, you might find this next fact interesting. Recently, I sat down with a friend of mine. He is a self-employed consultant, and as such, he has to buy health insurance through the open marketplace. His premium, to cover his family of 4, is $2,000/month. And with that, he still has a high deductible, and after deductible, the insurance only pays 70% of covered expenses. In other words, state-subsidized health insurance costs less and covers more. And that good news gets even better in retirement. More on that in a moment.
Additionally, employment in the state of Georgia system provides other perks, such as short-term and long-term disability insurance, and basic life insurance. Also, certain counties make matching contributions to social security. Others provide contributions to a county-sponsored retirement plan, such as a 403b, or, in the case of Gwinnett County, the Gwinnett Retirement System of Georgia (GRS). Add to that, generous time off, including paid holidays, and paid vacation time (and summer break for teachers), and the total compensation package for a Georgia public school system employee is hard to match.
Although I would argue, that the financial perks and time off represent good marketing bullet points for recruiting new prospective educators into the field, it is the retirement perks that are the most lucrative, and I believe, the most under-appreciated in terms of the total compensation package for Georgia public school employees. At Calder & Colegrove, we have served clients who fully retired at the young age of 52. Think about that for a moment: retiring at age 52. If I gave you the scenario of someone retiring at age 52 without telling you anything else, you might guess that the 52-year old invented the latest and greatest social media platform. Or you might think it was a C-level executive who got one of those “golden parachutes” in retirement. But, in most cases, I doubt you would first think of a 52-year old retiree as a career Georgia public school employee.
For those who work in the private sector, retiring in their 50s is quite rate – I mean dinosaur-extinct kind of rare. And the reason for that is simple: health care costs. Even if a private-sector worker builds a big retirement nest egg, paying for health insurance in the private marketplace from their early 50s, until age 65 (Medicare), is a tall order. The cost of health insurance for someone in their 50s or early 60s, is so expensive, that we refer to it as the new mortgage payment. And it’s even worse if there are other family members to consider, such as spouse, or children (remember, health insurance covers adult children up to age 26).
So how can someone afford to retire at age 52? It’s due to the two-fold retirement package for Georgia public school system employees: the pension and the retirement health insurance. Through TRS of Georgia, retirees enjoy a pension benefit that is approximately 60% of their pre-retirement income, and that income is guaranteed for life. It’s important to take a moment and understand how that benefit is funded. As of fiscal year 2019, employees contributed 6% of their pay to TRS of Georgia. But the employer contribution rate is a whopping 20.9% equivalent of each employee’s pay, into the pension system. Imagine, in the private sector, if you contributed 6% to a 401k and received a 21% match? Yet, that’s how the contributions operate in TRS of Georgia (Source: Georgia Budget and Policy Institute).
Now, let’s look at an example of how the TRS of Georgia pension pays out in retirement. Let’s assume that a retiree works for 30 years in the system and retires with a salary of $65,000. Using the TRS of Georgia pension calculator, the retiree will enjoy a $39,000/year pension for life! And if the retiree is married, TRS of Georgia provides an option to extend the pension, after death of the retiree, to the spouse or even to the children of the retiree. So, the question is: What is a $39,000/year pension worth? In other words, if someone in the private sector wanted to enjoy a similar guaranteed payment for life – or for two lives – how much would that cost? At a conservative estimate, to create something similar for a 52-year old in the private marketplace, I believe a second to die guaranteed lifetime annuity is as close as one can get to the income from a TRS of Georgia pension. And, if that pension began at age 52, a 4% guaranteed withdrawal rate is a reasonable estimate. Therefore, if you take $39,000 and divide by 4%, the answer is $975,000. So, to describe it in simple terms, it would take about $1mm in retirement savings at age 52, to replicate the value of the TRS of Georgia Pension.
But as good as the TRS of Georgia pension is for retirees, I believe that the state health insurance retirement plan is just as lucrative of a benefit. In the private sector, few of our clients have retired with any type of legacy health insurance benefit. It’s quite rare, and it’s the exception, not the norm. But for Georgia public school employees, it is a standard part of their retirement benefit. And this benefit, is the key to providing a retirement option to someone prior to their Medicare-eligible age of 65.
But not everything smells like roses as it pertains to the retirement benefit of Georgia public school system employees. Georgia public school system employees are employed at the county level. And each county in Georgia was presented the option, back in the 1970s, to participate or not participate in Social Security. Gwinnett County, for example, opted out. Outside of government entities, private sector employers are required to match social security contributions, to the tune of 6.2%. Gwinnett County, on the other hand, does not. Rather, as an alternative, Gwinnett County provides supplemental salary, and makes employer contributions to the Gwinnett Retirement System of Georgia (GRS), which is a supplemental pension plan, in addition to TRS of Georgia.
If you are a Georgia public school employee, I highly recommend that you take a moment and create/log into your Social Security Statement online, and take a look at the earnings history on the last pages of your statement. Note: if you have a credit freeze in place on your credit file, you will need to temporarily remove it if you are trying to establish your account at SSA.gov for the first time.
If you find years with $0 credit that coincide with your years as a public-school educator, then you are working for a Georgia county that has “opted out” of Social Security. You might be wondering: is that good or bad? Like many things in life, the answer is not simple. It depends. For example, if you are a career teacher in Gwinnett County, then you have spent your career not contributing to Social Security. But let’s say that you spent half of your career in Clarke County and half of it in Gwinnett County. Clarke County participates in Social Security and Gwinnett County does not. I would advise this: if you ever consider changing counties for public school employment, make sure to ask about their participation in Social Security. Because I believe that you should stay the course in Social Security funding. Either work for a county that participates or doesn’t participate. But I wouldn’t advise working for two counties, for an extended period of time, in which one county participates in Social Security and the other doesn’t participate in Social Security. Here’s why: There is a penalty, within Social Security, that reduces the benefit of a retiree who participates in a government pension plan (like TRS of Georgia), yet, does not contribute to Social Security (such as Gwinnett County). That penalty is called the Windfall Elimination Provision (WEP). Trying to calculate how much WEP may affect your Social Security check is a complex calculation. But it is one that we perform as a regular part of our practice for clients. Although the penalty stings when one realizes that it applies to their retirement, the penalty itself, is fair. For a Gwinnett County employee (for example), there may be many years of no social security tax paid. Therefore, the benefit should reflect this fact. That’s what WEP is for. The next penalty, however, is one that I find to be quite ugly and unfair.
To better understand the “ugly” penalty from Social Security, one has to first understand the typical survivorship benefit provided by Social Security to a surviving spouse. Let’s use my wife and I as an example. Let’s say, that at my age 80, my Social Security benefit is $3,500/month. Ruthie is 4 years younger than I am, so let’s assume, at her age 76, that she’s drawing $2,500/month based on her work history. For fun, let’s imagine, in that same year, that the Georgia Bulldogs win the National Championship and the Atlanta Braves win the World Series. As a fan of both, in my advanced age of 80, my elated state is too much for my heart, and I die on the spot – with a big smile on my face. Using that example, after my passing, Social Security would provide Ruthie with the higher of the two benefit checks, but not both. So now, she would receive $3,500/month, given the example I listed above.
Now, let’s imagine that Ruthie was a career stay-at-home Mom, and did not have earned income history with Social Security. Using the same example, Ruthie would still receive a Social Security spousal benefit check once she reached her Social Security full retirement age of 67. It would be an amount equal to about half of my check. It’s a spousal benefit that was built into Social Security at its inception. Continuing with this scenario, even as a stay-at-home career Mom, Ruthie would transition to my full $3,500/month check at my death. So, to summarize, a stay-at-home spouse, with little to no earnings history, will receive a 100% survivorship check at the death of the wage-earning spouse. Keep that in mind for a moment, because this is where the Social Security penalty for Georgia public school employees gets really mean and unfair.
Government Pension Offset (GPO):
For a Georgia public school employee, who did not participate in Social Security, and draws a pension, GPO will mostly, if not completely, eliminate the survivor benefit from Social Security. Let’s go back to the example from me and my wife. Let’s say that I served a long career in Financial Planning. But let’s suppose that Ruthie was a career public school teacher in Gwinnett County. Based on the rules of WEP from Social Security, Ruthie would essentially receive no benefit check from Social Security while we are both living. As I’ve explained previously, the WEP penalty, although a real stinger, makes sense, and in my opinion, it’s fair. But now, let’s suppose that I die first at age 80. Now, rather than Ruthie enjoying the continuation of my Social Security check, it would almost certainly be reduced to $0 or near $0, as a result of GPO. Let’s summarize how bad of a deal that is: If Ruthie were a stay-at-home Mom, never earning a salary during her “working years,” she would receive a 100% survivorship benefit check from Social Security upon my death. But, as a career public school employee, due to GPO, she would likely receive no Social Security survivorship check. In other words, she would be punished for having worked outside the home. Every which way I look at GPO, it makes no sense. And recently, I ran into a very strange and unusual circumstance. I have a client, who is a part-time administrative assistant in Gwinnett County public schools. This means that she has not contributed to Social Security and is subject both to WEP and GPO. Through the process of doing her planning, I’ve determined that the Social Security benefit she is walking away from, is potentially, better for her, than is her TRS of Georgia Pension. We are still weighing the facts, but it’s possible, that it may make sense, for her to forgo her pension, so that she becomes eligible for a spousal Social Security benefit in retirement, and her husband’s Social Security survivorship benefit, assuming that he dies first.
If the combination of these topics leaves you a bit confused, perplexed, and maybe even a little angry, you’re not alone. If we liken Social Security, and government pensions, to a dance, there is a lot of choreography to consider. There are many options, as it pertains to Social Security timing, TRS of Georgia pension options, and especially, survivorship options. Working with a qualified professional who is knowledgeable about this subject is vitally important. Check with your trusted professionals, from your CFP® Professional to your CPA, and inquire into their level of expertise and experience in helping you navigate this important, yet complicated subject.
Lastly, I ask that the reader of this article be careful not to misinterpret my intent. I grew up as the son of an educator. I was trained as an educator. And I’m married to an educator. As such, educators hold a special place in my heart. However, the popular sentiment of underpaid and underappreciated teachers, is an invalid argument that is used to promote increased pay and benefits, which is understandable. However, that argument, I’m afraid, also leads young people to steer clear of career education, due to perceived lack of pay and benefits. Due to the ever-changing nature of our economy, and the needs to create a more dynamic and more educated workforce for tomorrow, having the best and the brightest serve as educators is more vital now, than it has ever been. In terms of a lifetime compensation package, a Georgia public school educator’s total pay is competitive with many private sector professional positions. And I believe that the time has come, to promote that as good news, and put to bed, once and for all, the tired old story of underpaid educators in the state of Georgia.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. These are hypothetical examples and are not representative of any specific investment. Your results may vary.
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