Kentucky policy leaders have released their proposed changes to the ailing pension system and the reaction from state educators has been swift and ferocious. Educators have claimed the reforms will “destroy public education” while Governor Matt Bevin has shrugged off fears about mass retirements as “nonsense” and called reform critics “chicken littles.”
Neither kind of rhetoric is helpful. Pension reform is going to be painful to state employees and will have consequences in early retirements and possibly in public perceptions of the attractiveness of the teaching profession. Policymakers need to accept that the proposal does not, in fact, “keep the promise” for active employees. It keeps some promises, but reneges on others. And perhaps those broken promises should never have been made or were based on completely unrealistic assumptions about the long-term strength of the pension system. Either way, educators – including me (with 17 years accumulated in the system) – are looking at a less rosy retirement picture than we expected. People are understandably going to be upset about that.
On the other hand, educators must accept that reforms have to be made (and we should have been demanding changes long, long ago to prevent the current crisis). The pension system is now broken and threatens the fiscal solvency of the state. Many teachers seem to think that asking taxpayers (most of whom are already struggling to scrape together their own retirement) to sacrifice more to keep the current system limping along is sufficient. The state will definitely have to pour more public money into the pension system to keep it afloat (as it did last year) and to cover the existing liabilities (now $14.5 billion for the Kentucky Teacher Retirement System alone), even with the proposed changes. Tax reform may help. But even with more funding, the existing system is not sustainable. By the Kentucky Education Association’s own estimates, even if the pension system had been properly funded for the last decade, our KTRS liability would still be over $10 billion.
So what compromises are educators willing to make? What alternatives to the proposed pension reforms, if any, can be accepted? In their fury and frustration over the proposed reforms (agitated by the Governor’s sometimes provocative rhetoric), I don’t hear educator groups articulating their priorities for reform. Let’s consider key components of the suggested pension changes. Which of these would my fellow educators be willing to accept? Which are completely unacceptable? Until the conversation reaches this level, I’m not sure every day Kentuckians or our lawmakers are going to pay much attention to our concerns, nor should they.
Freeze on Cost of Living Adjustments (COLAs)
The proposed reforms have little impact on current retirees, which everyone seems to agree should be the top priority (policymakers early on rejected the idea of taking back previously-granted cost of living adjustments), and may account for the relatively measured response to the plan from the Kentucky Retired Teachers Association. However, the proposal calls for a five-year freeze on cost of living adjustments, which would also apply to future retirees during their first five years of retirement. This is probably the most legally uncertain element of the plan since teachers prepay their COLAs. I’m not an attorney, but it would seem to me that a court would view such changes in light of the total pension reform plan, which leaves retiree health insurance benefits – a costly component of the pension system – entirely intact. Cuts to the insurance program could have been far more costly to retirees in the long run that the COLA freeze. As reforms to the pension system go, this might be the least difficult to accept considering the alternatives.
Additional 3 Percent Contribution for Retiree Insurance
On the other hand, I’ve probably heard the most complaints from active employees about the plan to impose a three percent employee contribution to fund the retiree insurance program. It’s not clear to many teachers why this new contribution is needed, other than to further shift the burden for the program from the state to employees. For most employees this will amount to an immediate cut in pay, especially for university employees like me who haven’t had a meaningful salary increase in more than eight years. If this is all necessary, spreading the increase out over a three-year period would be less onerous, but obviously wouldn’t raise as much money for the system as fast. I think asking for some relief on this proposal might be a good priority for educators.
Sick days and the three year average
After five years, the proposal ends the practice of letting educators count credit for their accumulated sick days toward their last year’s salary for retirement purposes. Teachers can still get paid for 30% of their unused sick days (an incentive to stay at work and not use them), but the sick days won’t artificially inflate retirement benefits as they currently do.
Perhaps of greater long-term significance, after 2023 retirement benefits will also be based on the average of an employee’s highest five years of salary, rather than the current highest three years. This could mean significantly less lifetime retirement income for some employees, but will also help create more long-term stability and savings for the system.
There is no way to save the pension system without making some changes to the expected benefits for active employees, and I think these are reforms that we should accept. Retirement benefits should be based primarily on the income we actually received during employment. These perks were nice to have in the past, but given the current crisis seem reasonable to forgo.
Double dipping
Current KTRS rules place limits on how much retirees can work in certain roles in P-12 school settings without compromising their benefits, but the new plan stipulates that retirees may not work in any full-time “state employment” unless they suspend their retirement benefits temporarily while they work. This has potentially big implications for educators who might wish to retire and then work in university settings, charter schools, or other public roles. The lost opportunity to capitalize on the expertise of experienced educators would have to be weighed against the potential cost savings to the system of preventing this kind of “double-dipping,” but that should be a conversation we are having with lawmakers.
However, I also think it’s important for educators to realize how incongruous these kinds of provisions in our pension system are with the experience of non-public employees. Retirement benefits are supposed to provide for us when we are no longer working, not pad our incomes when we’re ready to start another career (as much as I might look forward to doing that myself someday; of course a second career in the private sector is still an option). Most Kentuckians don’t have these kinds of opportunities, and may not be sympathetic to our frustrations. Reforms like these should definitely be under consideration.
Shifting to a 401K system
Perhaps the biggest long-term proposal in these pension reforms is to shift new employees into a 401K-style system with a provision for districts and schools to match those contributions up to a certain limit. This exposes employees to market risks, to be sure, but is no less risky than relying on future politicians to keep the promises of past politicians (especially when those promises were based on rosy market assumptions that would make most financial planners blush), as our current situation clearly demonstrates. Many teachers might be better off today if they could have devoted the 12-plus percent of their paychecks that went into KTRS into individual retirement accounts. For this reason, I have always advised young teachers to supplement KTRS with separate retirement investments – not easy to do, but those who have made that sacrifice are probably very grateful at this point.
A 401K system is what most non-public employees use to save for retirement, but of course those employees also enjoy some additional protection from Social Security. Kentucky teachers do not pay into Social Security and are not allowed to draw those benefits. As a part of pension reform, Kentucky should consider this as an option for future educators, but it would not come without some potentially negative consequences, especially for active employees. For example, federal Social Security rules would consider a teacher a “new employee” each time a person switched districts or took time off to have children or pursue other career opportunities and tried to return to teaching, forcing them out of the old system and into a new one.
For these reasons I would have preferred to see some kind of hybrid plan that blended 401K contributions with a state pension, but such an approach might perpetuate some (or a lot) of the structural instability of the current system. Nevertheless, it should be a topic of discussion.
Let's measure our rhetoric and talk solutions
These are the kinds of conversations educators should be having with lawmakers and should be promoting in their public comments and on social media.
Yes, the system is going to need a bigger public investment of funds to make it work. We still do not have reliable forecasts of the potential costs savings, but these reforms are likely to just stop the bleeding. More revenues will be needed to cover the liability and put the system on a sound footing for the future. I am confident these will be big themes in upcoming discussions on tax reform and the state budget.
In the meantime, educators need to accept that structural changes in the system are necessary. We need to acknowledge what is good about the proposed reform plan. It largely leaves current retirees alone. It does not change the retirement age or years required for service for active employees. It preserves the basic benefit structure for active employees and allows us to continue to work beyond the minimum years of service if we choose to do so while contributing to a new system that will actually provide more financial security in the long run by diversifying our retirement investments.
But it does ask for some significant sacrifices, some which may incentivize premature retirements and add to our pension liabilities in the short run. Let’s be circumspect and thoughtful about which of those sacrifices we need to make to preserve the system and what alternatives we might propose that will minimize the risks to the profession and the students we serve.
Let’s show lawmakers and the public that we’re serious about fixing the system by measuring our rhetoric and bringing a real dialogue of compromise and idea sharing. Whatever potentially negative implications there may be to this conversation, pension reform is not going to destroy the teaching profession. I didn't choose this profession because of the pension, and I don't think most of my colleagues did either, as much as we hoped to enjoy that perk. The pension liability itself is a deterrent, among other things, to recruiting quality candidates into this business. Let's work with lawmakers to fix it so that we can put the state on a stronger, more sustainable financial path and then devote resources to all those areas of public investment currently compromised and threatened by this looming crisis.
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Usual disclaimer: All views expressed on this website are mine alone and do not reflect the opinions of Western Kentucky University (where I am associate professor of educational administration, leadership, and research) or the Kentucky Board of Education (where I serve as a member).
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