Tuesday January 14, 2025
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The Bevin administration released data showing new teachers enrolling in the defined contribution retirement plan, a 401(a) plan, can be wealthier at retirement than if they began in the defined benefits plan currently in law.
The estimate shows that a new teacher starting at age 24 and working until age 61 will start retirement with $1.59 million. If reinvested, this could translate into a payout of $5,400 per month with a yearly increase of 1.4 percent for inflation. This will also leave $876,000 for the teacher to pass on to family or charity. In contrast, the same teacher retiring at 37 years enrolled in the defined benefit plan currently in place would receive approximately $5,400 per month for life with no benefit to pass on to family or charity.
“New teachers who fully fund their new defined contribution retirement plan can retire with a substantial retirement benefit over which they will have complete control. The benefit can be a monthly payment or a large amount to satisfy an urgent need or desire. Plus, to the extent that funds are not used during retirement, money can be transferred to a surviving spouse, other family members, or charity,” said State Budget Director John Chilton. “Teachers and all public employees will have the comfort of knowing that a fully funded defined contribution plan can contribute significantly to a secure retirement.”
The defined contribution calculation above is based on 18 percent of payroll, for 37 years, invested at an expected 7.5 percent rate of return – the investment assumptions that the Teachers Retirement System currently uses in its projections. The calculation also assumes income replacement at 92 percent and a post-retirement investment rate of return at four percent for 30 years. If the teacher chooses to reduce the income replacement amount to 80 percent, which is the rate financial advisors recommend to maintain equivalent lifestyle, he or she would draw $4,700 per month with $1.435 million left to pass on to family or charity.
Both the defined contribution and defined benefits calculations are based off the current salary schedule published by Franklin County Public Schools for Rank II teachers with a starting salary of $42,000.
Critics of the “Keeping the Promise” plan argue that teacher recruitment will be negatively affected by the proposed pension reform, but the data provided directly refutes this talking point. “Keeping the Promise” will save Kentucky’s pension systems while simultaneously providing a stable financial foundation for incoming, current and retired teachers and public servants.
Gov. Matt Bevin, together with Senate President Robert Stivers and House Speaker Jeff Hoover, today unveiled “Keeping the Promise” — a comprehensive plan to save Kentucky’s ailing public pension systems.
“There is no such thing as an insurmountable obstacle,” said Gov. Bevin. “We, as a Commonwealth, have a moral and legal obligation to fulfill the promises that have been made to our public employees. This is not just about fixing our present underfunding problem. It is also about ensuring that we leave a better, financially stable Kentucky to our children.
“The right thing to do is rarely the easiest, but we are determined to address this crisis with the most fiscally responsible public pension reform plan in the history of the United States. I am confident that the rest of the country will pay close attention to this excellent work by our legislature and for good reason. For those retired, for those still working, and for those yet to come: we are truly fixing our broken pension systems. United we stand. Divided we fall.”
Highlights of the plan include:
- “Keeping the Promise” will save Kentucky’s pension systems and meet the legal and moral obligations owed to current and retired teachers and public servants
- Requires full payment of ARC and creates new funding formula that mandates hundreds of millions more into every retirement plan, making them healthier and solvent sooner
- For those still working: no increase to the full retirement age, and current defined benefits remain in place until the employee reaches the promised level of unreduced pension benefit
- For those retired: no clawbacks or reductions to pension checks, and healthcare benefits are protected
- For future non-hazardous employees and teachers: enrollment in a defined contribution retirement plan that will provide comparable retirement benefits
- For current and future hazardous employees: will continue in the same system they are in now
- Closes loophole to ensure payment of death benefits for the families of hazardous employees
- Stops defined benefits plan for all legislators, moving them into the same defined contribution plan as other state employees under the jurisdiction of the KRS Board
- No emergency clause: law will not go into effect until July 1, 2018
- Structural changes should improve the Commonwealth’s rating with credit agencies, which have downgraded Kentucky’s rating, citing unfunded pension burdens
Gov. Bevin will call the General Assembly into special session in the coming weeks to pass into law these much-needed reforms.
“Our state’s pension systems are among the worst-funded in the country,” said Senate President Stivers. “In order to move these systems forward along the path to solvency, bold action is required. The framework that we have in place for a pension reform bill is morally right, fiscally responsible, and legally defensible. I thank Governor Bevin, Speaker Hoover, and all my colleagues in the Legislature for their help and support throughout this process, and I look forward to hearing feedback from constituents and moving forward in the coming weeks.”
“Kentucky’s pension problem has been a long time in the making, and has only gotten worse by past leaders who failed to act, or even acknowledge, the issue,” said Speaker Jeff Hoover. “Unlike in the past, inaction is simply not an option. The New Majority is committed to address the pension problem by providing a strong foundation that results in long-term pension stability for public workers and teachers.”
The Commonwealth’s three major public pension systems — Kentucky Retirement Systems (KRS), Teachers’ Retirement System of Kentucky (TRS), and the Kentucky Judicial Form Retirement System (KJFRS) — collectively administer eight distinct retirement plans.
The state currently has an unfunded pension liability of at least $64 billion, ranking as the worst funded system in the nation. Using prior funding patterns, experts conclude that the Kentucky Employee Retirement System, Non-Hazardous (KERS-NH), will run completely out of money by the year 2022 if meaningful pension reform does not occur.
With $7 billion in negative cash flow over the past decade, Kentucky’s pension spending has been increasing nearly five times as fast as revenues. This effectively reduces funds available for other important budgetary priorities such as education, healthcare, public safety and transportation infrastructure.