Kentucky has fallen to 42nd among states in teacher salaries, and the average district is paying its teachers 20% less than it was before the Great Recession after adjusting for inflation. Inadequate pay is contributing to a growing teacher shortage across the commonwealth.
Despite this reality, some are falsely claiming that total teacher compensation in Kentucky has actually grown. That assertion wrongly counts as compensation the employer contribution payments the legislature is finally making to pensions to catch up from years of knowingly underfunding those systems. Like with any debt that goes unpaid, interest expenses compound over time. However, those payments do not increase the benefits teachers will receive upon retirement; instead, they are necessary to make sure teachers get the retirement benefits they were promised and are legally owed.
On the contrary, the pensions that retired Kentucky teachers receive are getting smaller after taking inflation into account. The major reasons for this decline include:
- Pensions are based on the final average salary of teachers in the years before they retire. As salaries have declined, pension benefit levels have declined with them.
- The annual benefit increase given to retired teachers each year to keep up with the rising cost of living (known as a cost of living adjustment, or COLA) is significantly lower than recent rates of inflation, eroding the purchasing power of pensions even further.
- The value of pensions will decline even more in the future due to a series of reductions made by the legislature in how benefits are calculated.
Pensions for new retirees are declining with erosion of final average salaries
At their most basic, defined pension benefits are calculated based on years of service, the final or highest average salary of the employee, and a “multiplier.” For example, a company’s pension plan might allow an employee who worked for a large private corporation for 27 years and whose average salary in their last five years of work was $70,000 to use a multiplier of 2% to receive a benefit upon retirement of $37,800 a year ($70,000 x 27 x 2%).
Nearly all retirees receive Social Security benefits, which average an additional $24,000 a year. The hypothetical private sector retiree mentioned above would receive that amount in addition to their $37,800 pension. However, Kentucky teachers do not pay into or receive Social Security benefits upon retirement, making their pension that much more important.1
Since final average salary is a major factor in the size of a retiree’s pension benefit, pensions get smaller over time when salaries do. And in Kentucky, teacher salaries have fallen far behind inflation since the Great Recession hit in 2008. Recent trends in the pensions of new teacher retirees are shown in the graph below. Newly retired, full-career employees who work between 25 and 29.99 years (by far the most common group of retirees) had their highest benefits in 2016 in current dollars, but new retirees in 2024 with the same years of service had benefits that were worth $8,564 less, or a 14% decline. This reduction reflects the erosion of final average salaries used to calculate benefits, which fell by an inflation-adjusted 15% during that time.
Pensions have lost further purchasing power after retirement because recent annual adjustments haven’t kept up with inflation
Another challenge to the value of teachers’ pensions is that Kentucky law only allows a 1.5% annual COLA in teachers’ benefit levels each year after retirement. That rate of COLA is far below inflation in recent years, which has averaged 5% annually over the last four years using the Consumer Price Index (CPI). In contrast, Social Security benefits — which retired Kentucky teachers are not eligible to receive, as mentioned — are increased by the full CPI each year, as shown in the table below.
The average teacher who retired with 25 to 29.99 years of service in 2006 received an initial pension of $35,976 a year and is now receiving $47,033 because of the 1.5% COLA each year. But if their benefits had been adjusted for CPI each year instead, they would receive $56,143 now. That results in a decline of $9,110 or 16% in that retiree’s purchasing power since they retired. The graph below shows how the purchasing power of average full-career teachers has declined since their year of retirement as inflation has exceeded 1.5% in most years, especially recently.
Benefits will continue to decline as more teachers retire from later tiers with lower benefits
The final major factor in determining the size of pensions, as described earlier, is the multiplier. The legislature has steadily decreased that number through a series of complex changes starting with teachers hired after July 1, 2002. These new “tiers” contain reduced multipliers for certain groups of teachers and stiffer requirements for benefit eligibility based on age and years of service. Currently, all full-career teacher retirees were hired before July 1, 2002 and thus were part of the Tier 1 cohort eligible for the largest pension benefits. As more teachers retire under the subsequent tiers in the coming years, benefit levels will decline.
For example, a Tier 1 teacher hired before July 1, 2002 with 20 years of service would use a multiplier of 2.5%. In contrast, a Tier 3 teacher with 20 years of service hired between July 1, 2008 and December 31, 2021 would use a multiplier of 2%. That change would make the Tier 3 retiree’s pension benefit 20% smaller than the Tier 1 retiree, holding all other factors equal.
See here for a description of Tiers 1, 2 and 3 and here for a description of Tier 4, which increased the contribution teachers must make to their pensions and shifted more of the benefit into a defined contribution plan with somewhat greater employee risk.
Ignore false claims that count catch-up pension debt payments as if they boosted teacher retirement
State pension contributions increased beginning in 2017 as the legislature began making catch-up payments for years of past underfunding of the retirement system. But those increased payments will not result in better benefits for teachers. On the contrary, teacher pensions have declined in purchasing power as salaries and COLAs have not kept up with inflation and as newer tiers were introduced that contained lower multipliers used to calculate benefits. Smaller pensions, just like lower salaries, contribute to difficulty in attracting and retaining the qualified teachers Kentucky students need to get the great education they deserve.
