Switch to 401k-Type Plan for Kentucky Public Employees Will Cause More Harm

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Kentucky needs solutions that work to pay down its unfunded pension liabilities. A new report from the Kentucky Center for Economic Policy and the Keystone Research Center shows shifting state employees to inefficient 401k-type defined contribution plans won’t reduce the liabilities but will make the funding challenge worse while harming the workforce and economy. Highlights from the report are below.

Defined Contribution Plan Will Fail to Save Money Compared to Inexpensive Existing Plan While Introducing New Costs
Regular costs of state pension plans are already low, and plans have been through multiple rounds of cuts.

New Kentucky employees contribute more toward their pensions than does the state, and the low state contribution is comparable to what private sector employers contribute for 401k plans and Social Security. The legislature already cut benefits and required more years of service for retirement eligibility in 2008, ended cost of living adjustments for state worker retirees in 2012 and moved new state and local employees into a hybrid cash balance plan that shifts risk to those workers in 2013.

State studies show new plan designs aren’t cheaper.

Past actuarial analyses of moving Kentucky workers to a defined contribution plan and creating a hybrid plan showed they would be no cheaper for new workers than the existing defined benefit plan.

Defined contribution plans cost more to deliver the same retirement benefit.

Defined contribution plans are less efficient than defined benefit plans because of portfolios less balanced by workers of different ages and the cost of purchasing annuities, among other factors. Experts say it costs between 42 percent and 93 percent more for a defined contribution plan to provide the same level of retirement benefit as a defined benefit plan. An actuary hired by Kentucky in 2015 said it would cost substantially more to shift Kentucky teachers to a defined contribution plan than keep the existing plan.

Switch would make it more expensive to pay down unfunded liabilities.

A switch to defined contribution plans would close the existing pension plans to new members, which would lower investment returns on the existing plans’ assets over time, adding large costs to pay down unfunded liabilities. Studies in 14 states that have considered a switch to defined contribution plans projected that closing a defined benefit plan lowers investment returns and increases the costs of paying down legacy debts.

Switch to Defined Contribution Plan Undermines Ability to Attract Skilled Workforce and Weakens Local Economies

Switch would raise costs by making it harder to attract and retain a skilled workforce.

Kentucky public employees already make less in total compensation than comparable workers do in the private sector, research shows. Especially since governments are large, permanent employers, it makes sense for them to use defined benefit pensions as a tool to compete for qualified workers in lower paying public sector jobs. Workers in positions that provide defined benefit pensions tend to have lower turnover and longer average tenure, meaning lower recruitment, hiring and training costs for employers.

Shift would weaken local economies.

A less secure retirement from inferior 401k-type plans would also harm local economies where pension benefit checks play a major role, and raise public benefit costs as more workers retire into poverty. Pension benefits inject $3.4 billion into the Kentucky economy each year. As those monies are spent at local businesses, they have a multiplier effect that results in the creation of jobs.

Many Kentucky Workers Have Gained Insurance through the Medicaid Expansion and Are Now at Risk

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Thousands of Kentuckians who work low wage jobs at restaurants, on construction sites and at retail stores are among those who have gained health insurance because of Kentucky’s decision to expand Medicaid under the Affordable Care Act (ACA), newly-available Census data show. These workers’ access to care is now at risk if the ACA is repealed or Kentucky takes steps backward on the expansion, harming our economy and the health of our state.

Over half of all Medicaid eligible Kentuckians who gained health insurance between 2013 and 2015 held a job, according to American Community Survey data. When you factor in the same low-income Kentuckians who held a job at some point in the past five years that proportion grows to nearly 4 in 5.

The biggest industries where workers have gained coverage are as follows:

  • Restaurant and food services, where there are 15,980 more insured workers. Whereas 58 percent of workers in that sector whose family incomes were below the eligibility level for Medicaid under the expansion were uninsured in 2013, only 23 percent were uninsured in 2015. 1
  • Construction, with 6,190 workers gaining health insurance and an uninsured rate that fell from 63 percent to 20 percent.
  • Department and discount stores, with 6,120 workers gaining health insurance and an uninsured rate that fell from 50 percent to 5 percent.

The next largest groups of workers with coverage gains were those employed in gas stations, auto manufacturing, grocery stores, hospitals, children’s day care, general merchandise stores and landscaping services (see chart on following page).

Kentucky is a national leader in health coverage gains under the Affordable Care Act. 2 While most of those who are gaining insurance are working, they are in jobs that do not offer them coverage. The share of Kentucky workers who had access to health insurance through their employer has gradually fallen from 70 percent in 1980-1982 to only 53.7 percent in 2011-2013. 3 Medicaid, as well as access to private insurance with the help of tax credits, are helping fill the gaps left by an eroding employer-based insurance system.

Kentucky ranks near the bottom on many health measures, making our decision to expand Medicaid that much more important. Recent studies from the Chan School of Public Health at Harvard show progress: Kentuckians are getting more preventative screenings and care, more care for chronic conditions that otherwise worsen more severely over time and even report having better health.4 Their ability to go to the doctor for regular checkups and when sick means the rest of the state can stay healthier.

Those gains are seriously threatened with the newly-elected president and Congress promising to repeal the Affordable Care Act, which provided for Medicaid to be expanded in the first place. Doing so would result in an estimated 29.8 million fewer Americans having health insurance, and millions more being vulnerable to many of the harmful practices insurers are currently barred from using.5 Also, the recent request to make changes to Kentucky’s Medicaid program puts the state’s gains at risk. With barriers to coverage, reduced benefits and administrative complexity that both adds unnecessary cost and confusion for beneficiaries, much of the progress we’ve seen would start to move backward under such a plan. 6

It’s important that federal and state lawmakers protect the advances we are making in health care for the sake of workers and the entire economy.




  1.  Report looks at citizens ages 19 through 64 in families with income at or below 138 percent of the federal poverty line who have worked within the past twelve months. Citizens are the focus because the Medicaid expansion is generally unavailable for non-citizens.
  2. US Census Bureau, “Health Insurance Coverage in the United States: 2015,” September 2016, https://www.census.gov/library/publications/2016/demo/p60-257.html.
  3. Economic Policy Institute analysis of Current Population Survey March supplement.
  4. B.D. Sommers, R.J. Blendon, & E.J. Orav, “Both the ‘Private Option’ and Traditional Medicaid Expansions Improved Access to Care for Low-Income Adults,” Health Affairs, January 2016 35(1):96–105, http://content.healthaffairs.org/content/35/1/96.full?keytype=ref&siteid=healthaff&ijkey=A6hBKcGzMrX2A.                   B.D. Sommers, R.J. Blendon, E.J. Orav & A.M. Epstein, “Changes in Utilization and Health among Low-Income Adults After Medicaid Expansion or Expanded Private Insurance,” JAMA Internal Medicine, August 8, 2016, http://archinte.jamanetwork.com/article.aspx?articleid=2542420.
  5. L. Blumberg, M. Buettgens, & J. Holahan, “Implications of Partial Repeal of the ACA through Reconciliation,” Urban Institute, December, 2016, http://www.urban.org/research/publication/implications-partial-repeal-aca-through-reconciliation.
  6.  Dustin Pugel & Jason Bailey, “Proposed Medicaid Waiver Would Reduce Coverage and Move Kentucky Backward on Health Progress,” Kentucky Center for Economic Policy, October 7, 2016, http://kypolicy.org/dash/wp-content/uploads/2016/07/1115-Medicaid-Waiver-Federal-Comments-KCEP.pdf.

The State of Working Kentucky 2016

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Despite steady improvement in the overall economy since the Great Recession, the current presidential election cycle has demonstrated Americans’ persistent and perhaps even worsening anger about the economy. Jobs are still too scarce, the standard of living for many low- and middle-income workers remains precarious and income inequality continues to soar. These sentiments are borne out by the data on Kentucky’s workers and economy. To learn more, click to read the State of Working Kentucky 2016.


Kentucky’s Lopsided Recovery Continues

Job growth in Kentucky’s recovery continues to be concentrated in a minority of counties located in more prosperous parts of the state while many rural Kentucky counties face employment conditions that are much worse than before the Great Recession — and in some instances are worsening.

As was the case a year ago, only 28 of Kentucky’s 120 counties had more people employed in March 2016 (the latest month available) than in March 2007, according to Bureau of Labor Statistics data that looks at employment by county of residence (see map below). Five central Kentucky counties — Scott, Washington, Nicholas, Oldham and Woodford — have experienced employment growth above 10 percent over that time period (as has Todd County). In raw numbers, employment increases are by far the highest in Jefferson County (19,592) and Fayette County (13,195), with job growth of 6 percent and 9 percent respectively since 2007.

In contrast, 24 counties have seen a 20 percent or greater decline in employment since 2007. Most of these steep job losses are in eastern and northeastern Kentucky counties or parts of western Kentucky. Employment declines exceed 30 percent in Breathitt, Elliott and Harlan counties. Five counties have at least 4,000 fewer people employed — Pike, Boyd, Christian, Greenup and McCracken — an increase from 2 such counties a year ago.

Gaps between some growing and declining counties appear to be getting larger. A total of 51 counties have fewer people employed in March 2016 than in March 2015. Five counties have at least 3 percent fewer jobs than last year, with Harlan County seeing the biggest drop at 3.9 percent.

While Kentucky’s economy overall shows improvement, the economic well-being of regions of the state are diverging. Industry trends play an important role. Certain manufacturing sectors like the auto industry have bounced back as have industries like warehousing and logistics, all of which rely on areas of the state with access to markets and infrastructure. Construction has begun to rebound recently and the health care sector has also grown. Job losses reflect in large part a decline in coal employment and specific manufacturing industries like computer and electronic products, steel, clothing, and wood and paper products.

Federal and state policymakers should be putting much greater emphasis on economic relief and job creation strategies in hard-hit areas of the state. That means expanded investment rather than more budget cuts in infrastructure, education and human services; fairer trade policies than those that have harmed Kentucky manufacturing and no more deals designed to benefit powerful interests; expansions of the safety net rather than a weakening of it; and specific development strategies for regions like the coalfields experiencing fundamental economic transition. That will require Congress to pass laws like the RECLAIM Act, which would release $1 billion to restore abandoned mine lands in coalfield communities.

To view a larger version of this map, click here.


Job Growth since Recession Continues, but Quality is Mixed

After major job loss in the Great Recession, Kentucky’s economy has gradually improved and the state has added 141,000 jobs since June 2009. The pace of job growth has picked up over the last year, with the state adding more jobs since last June than any year since 1999.

When it comes to job quality, though, the story is more complicated with both good and bad news for Kentucky workers. Growth in industries like manufacturing and logistics suggest Kentucky is strengthening its role as a production state. But jobs in some traditionally good-paying industries are changing, while other sectors with strong growth provide much less pay and job security. These trends raise important questions about whether new jobs being created can sustain Kentucky families.

One area of good news is the rebound in the auto industry. Kentucky gained 19,900 jobs in that sector over the last six years, or growth of 49 percent, from 41,000 jobs to 60,900. Growth was strong both in auto parts (49 percent) and assembly (54 percent). The auto industry has experienced revival due to the federal government’s financial rescue, restructuring of the industry, on-shoring of some production and Kentucky’s strong supply chain. Average weekly pay in the industry in Kentucky is an impressive $1,182, although new jobs typically pay less than existing jobs.

Related to recovery in manufacturing nationwide, along with increases in consumer spending, is growth in transportation and warehousing jobs. Jobs in that sector have increased by 10,900, or 13 percent, since 2009. Kentucky’s location makes it a key state in that industry. Average pay is $964 a week.

However, the single industry that has had the most job growth is far less encouraging: employment services made up primarily of temporary agencies. The state saw 32,400 new jobs in employment services over the last five years (meaning one in five of the net new jobs created), or growth of 116 percent. Traditionally associated with service businesses, temp agencies are increasingly used to staff manufacturing industries as well — including the auto industry.

Jobs provided through temp agencies typically have lower pay, receive less training and are associated with poorer working conditions. Average weekly pay in this sector in Kentucky is just $449 a month. An important question is the extent to which the explosion in temporary jobs reflects the early stages of the recovery — with industries making more jobs permanent as the recovery advances — versus a permanent change in businesses’ staffing patterns.

Among other lower-paying industries that have added substantial employment, food services and drinking places (primarily restaurants, both full-service and fast food) have added 17,800 jobs. Average pay in that industry is only $289 a week compared to $836 for all industries. Fast food workers have become widely-recognized symbols of a low-wage economy, and many tipped restaurant workers struggle to make ends meet.

Some health-related services have also had strong job growth. Kentucky added 9,300 jobs over the last six years in ambulatory health care services, meaning doctors’ and dentists’ offices and other outpatient health care facilities. Growth is particularly strong in the last year, with health care reform and especially the Medicaid expansion likely playing a role. The state has also added 8,400 jobs in the social assistance sector including care services for the elderly and disabled. Average private sector weekly pay in the latter industry is only $340.

Overall, the recovery is a mixed story for job quality in the state. Growth in factory jobs re-solidifies Kentucky as a leading manufacturing state, as does related growth in transportation and warehousing. But gains in some low-wage service sectors and the rise of contingent employment across the economy mean some Kentuckians are taking on jobs that don’t pay well or provide the economic security they seek.

Source: KCEP analysis of Bureau of Labor Statistics Current Employment Statistics data. Wage data in blog are latest available from the Quarterly Census of Employment and Wages.

What the Research Says about “Right-to-Work” Laws, Employment and Wages

As several Kentucky counties have passed or are considering local “right to work” (RTW) laws, serious research calls the benefits of such laws into question. The best evidence suggests that RTW fails to result in stronger job growth including in manufacturing while resulting in lower wages and benefits for workers in RTW states.


RTW laws prohibit unions and employers from including a provision in contracts that requires employees who benefit from union representation to pay their fair share toward those costs. In becoming RTW, Kentucky counties including Warren, Todd and Boone are the first local governments in the nation to join the 25 states with RTW laws, including most recently Indiana and Michigan in 2012 and Wisconsin in 2015. Despite its name, RTW does not increase or enhance access to jobs, nor does it ban forced union membership, as such is already illegal under federal law.

Proponents are making bold claims about the potential of RTW to boost Kentucky’s economy, in particular that it will grow manufacturing jobs as existing companies expand and new ones locate here. But studies that use careful statistical techniques to analyze the experience of states do not support claims of the economic benefits of these laws, while pointing out potential harm to workers in terms of job quality.

What the Research Says about “Right-to-Work” Laws

The State of Working Kentucky 2014

SOWK cover 2014More than five years after the recession officially ended, Kentucky workers still struggle with a scarcity of jobs and face continued declines in real wages, as outlined in KCEP’s new report The State of Working Kentucky 2014.

The report describes the damage done by the Great Recession and the substantial jobs gap that still needs to be closed; examines how today’s economy affects different workers based on age, education, race, gender and other factors; and looks at the disturbing long-term trend in wages that is lowering living standards for many Kentucky workers.

As the report shows, the lack of jobs has led to a decrease in the labor force as many workers have become discouraged from finding work. And even those with jobs face challenges. A record high of nearly one in four Kentucky part-time workers say they would rather have a full-time job if it were available.

Still-high unemployment is a major factor keeping wages down; the late 1990s was the only period in the last 35 years in which Kentucky workers’ wages grew—because the unemployment rate at that time dropped down to four percent. Between 2001 and 2013, the report shows, Kentucky workers’ median wages fell by eight percent after adjusting for inflation, and low-wage workers’ wages fell seven percent. Other factors contributing to sagging wages include the loss of jobs in sectors like manufacturing—and their replacement with low-wage service jobs—and the erosion in the value of the minimum wage.

The report shows that all types of Kentucky workers have been harmed by the shortage of jobs, even those with higher levels of education. It’s been especially painful for people of color, young people and workers with less than a high school degree. Of particular concern are the long-term unemployed, who remain a persistently-high one-third of Kentucky’s unemployed but whose jobless benefits now run out sooner because Congress did not extend them at the end of 2013.

One important countertrend to the challenges faced by Kentucky workers today is the improvement in health insurance coverage as a result of the Medicaid expansion and creation of the state’s new health care exchange, Kynect. Since November 2013, 521,000 Kentuckians have signed up for coverage through Kynect, about 75 percent of whom are newly insured.

There is more the federal and state government can and should do to improve the economic picture for Kentuckians. Policy recommendations in the report include avoiding prematurely raising interest rates and choking off the recovery, putting people to work addressing needs like repairing schools and improving infrastructure, increasing the minimum wage, and passing state tax reform to allow more investments in supports for Kentucky workers.

The State of Working Kentucky 2014

Another Bad Year for Kentucky Workers’ Wages

Real wages for Kentucky workers fell again last year, continuing a slide that began in 2001. Congress’ unwillingness to spur a stronger economic recovery and act on policies like raising the minimum wage play a big role in depressing wages.

Low wage Kentucky workers continue to see the real value of their wages erode. Inflation-adjusted wages for workers at the 10th percentile fell 1.5 percent in 2012—to $7.99 an hour—and have declined 6.5 percent since 2001. Likewise, workers at the 20th and 30th percentile have seen the purchasing power of their wages decrease over the last decade.

KY workers' wages sag_0
2012 dollars; Source: Economic Policy Institute analysis of Current Population Survey data

Kentucky workers at the median (where half of workers make higher wages, and half make lower) saw their wages fall 2.8 percent in real dollars in 2012. They’ve experienced a 7.1 percent decline since 2001.

median KY workers' real wages are fallin

2012 dollars; Source: Economic Policy Institute analysis of Current Population Survey data

The failure of federal action to spur faster economic growth is a big cause of wage losses. Continued high unemployment means there are still three job seekers for every job, putting little pressure on businesses to raise wages in order to attract workers. In contrast, unemployment was very low in the late 1990s and early 2000s and employers had to pay higher wages to compete for fewer available employees.

At the Consensus Forecasting Group meeting in Frankfort this week, the governor’s chief economist noted continued uncertainty about the economy because the “engine of economic growth is yet to be identified.” The three main engines of the economy are consumer spending (which is the biggest), government spending and business investment. Consumer spending is weak because without job and wage growth people don’t have money in their pockets to spend; cuts in government spending are harmful because they directly eliminate jobs; and businesses aren’t investing because they don’t see consumer demand for their products and services. What’s needed is more short-term federal investment to spur faster job growth.

Additionally, raising the federal minimum wage to $10.10 an hour, as Sen. Tom Harkin and others have proposed, would either directly or indirectly lift the wages of over one in four Kentucky workers. If the minimum wage had kept up with the average workers’ wage growth over the last four decades, it would be $10.50 an hour rather than $7.25. Decreases in unionization also play a big role in workers’ wage declines, as does the elimination of good-paying manufacturing jobs. While those jobs disappear, the new jobs being created tend to pay low wages.