KY Policy Blog

Even Big Cuts to New Teachers’ Pensions Would Do Little to Address System’s Funding Challenge

By Jason Bailey
October 27, 2015

Even if the state were to massively cut pension benefits for new teachers, it wouldn’t result in meaningful savings to the teachers’ retirement system over the 30 year period needed to pay down its unfunded liability, according to information provided to the system’s funding work group.

Thus the state could deeply reduce retirement security for new teachers through benefit cuts — and drive up the challenge of attracting and retaining good teachers — without making a real dent in the serious financial problem now facing Kentucky. Cuts to new teachers’ benefits are no substitute for generating additional revenue to pay back the liability owed to current teachers and retirees.

A consultant to the work group showed that to make the teachers’ pension system sound, annual contributions over the next 30 years should equal approximately 38 percent of teachers’ salaries. Of that amount, nine percent is what teachers contribute from their paychecks and seven percent is the state’s regular contribution for teachers’ benefits (referred to as the “normal cost”). The remaining 22 percent is the amount needed to pay off the unfunded liability resulting from the state failing to make its contributions in the past compounded by investment losses from the last two recessions.

The state’s current contribution is 14 percentage points short of what it should be putting in. At $35 million for each percentage point, that means the state is underfunding the plan by about $490 million a year.

New teachers’ pensions cost the state 6-to-7 percent of salaries, which is only slightly more than other employers in the state and country contribute for their employees’ Social Security (employers put in 6.2 percent of workers’ salaries for Social Security, which employees match). Even if the state were to completely eliminate its contribution for new teachers, the savings as a share of payroll of six-to-seven percent would not be fully realized until the entire workforce is made up of teachers hired after the change is made. That would be about 30 years from now and by that time the state’s large unfunded liability will already be paid off if the system is to stay in accordance with accounting rules.

So such a change would have little impact on closing the annual shortfall we face now of 14 percent of payroll, but it would be a draconian cut in those teachers’ benefits down the line. New teachers would receive roughly 42 percent less in lifetime retirement income than they would receive under the current plan, according to the consultant’s data. Kentucky teachers now receive only $36,000 a year in pension benefits on average and don’t receive Social Security.

New teachers have been a focus of cuts because their plan can be changed more easily than existing teachers and retirees, whose benefits are already legally promised. But the problem can’t be solved on new teachers’ backs because their plan is already inexpensive to the state and any significant savings wouldn’t come for decades — and only then at a painful cost to teachers and Kentucky’s education system.

There’s one critical solution to this problem and that’s for the state to generate the new revenue needed to make the full required contribution each year while also meeting Kentucky’s other important obligations.

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