Traditional pension plans are a great retirement solution for millions of Americans and are a sustainable financial model if an employer contributes the required amounts to the plan and makes proper actuarial assumptions. Unfortunately, since 2007, instead of contributing to the Teachers' Retirement System (TRS), our state government has essentially borrowed billions of dollars that it pledged to our teachers to fulfill their spending priorities with other special interests. Because Frankfort has not contributed requested amounts to the TRS from 2007 - 2016, teachers have not only missed out on the principal that is owed to them, but also the billions of dollars in compounded interest to which they should be entitled. After all, in 2004, the TRS was more than 90 percent funded. Now, it's only 56 percent funded and $15-20 billion in debt.
Even the PFM Consulting Group report stated the primary reason for the TRS’ lack of funding is related to poor actuarial assumptions and the lack of contributions by state government. Life expectancy and the total amount of teachers who both retired and actively teaching, on the other hand, have not changed much since 2004.
The same government that owes money to TRS hired The PFM Consulting Group to come up with recommendations to deal with the pension crisis in the state. It is no surprise that its recommendations rely on draconian cuts to retirement benefits for current teachers and those who have already retired. The consultant did not take into consideration the possibility of additional revenue resulting from tax reform or other potential funding mechanisms.
This is a matter of priorities. It is morally wrong to ask teachers to suffer because our government refused to contribute the requested amount of funding to the TRS from 2007 to 2016. The primary culprit of this fiscal issue -- our state government -- should be required to provide a realistic way of funding its obligations through additional capital resources, new forms of revenue, or spending cuts in other areas of government.
Making a transition from a defined-benefit plan to a defined-contribution fund means new hires will not be paying into the existing pension fund (which will continue for those teachers who have already retired) and more government resources will be spent for employer matches under the defined-contribution plan. This will result in further fund instability and exacerbate the financial issues facing our existing public pensions. Other states that have tried to address pension underfunding by converting to a defined-contribution plans have seen dismal fiscal results.
Wall Street is the only winner when converting to a defined contribution plan. 401(k) style plans carry much higher both to administer, and also higher fees on individual mutual fund offerings for teachers.
Traditional defined benefit plans (current plan) are more efficient due to economies of scale, risk pooling, and other factors. Changing plan types introduces significant transition costs. States that switched to defined contribution plans did not save money except to the extent that they cut benefits or required workers to contribute more to their retirement.
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The PFM recommendations suggest that 401(k)-style defined-contribution plans are common in the private sector and that teachers should be required to use the same sort of plan.
Professionals in the public sector with a master’s degree make on average approximately 60 percent less per year than private-sector professionals with similar educational backgrounds. In addition, many private sector professionals have much richer benefits than teachers including but not limited to:
• Tuition reimbursement
• Profit-sharing plans
• Stock-option plans
• Discounted stock purchase plans
• Company vehicles
• Flexible hours
• Deferred compensation plans
Private-sector employees participate in and receive benefits from the federal Social Security retirement system. Kentucky teachers are not eligible for Social-Security retirement benefits because of their participation in TRS.
While it is true the private sector employees are used to 401(k)-style retirement plans, they also have access to a tremendous amount of benefits that are not offered in the teaching profession.
Many teachers are passionate about working with children and choose the profession knowing that if they put in a significant amount of time and effort educating Kentucky’s youth, they will be taken care of with a modest, yet dignified retirement when their teaching days are over.