A state pension is the only retirement vehicle Kentucky teachers have in retirement
Kentucky teachers, by law, are not eligible to receive Social Security benefits, either personally or from their spouses. While some caveats exist, state retirement benefits by the Teachers Retirement System (TRS) are usually the only safety net available to retired teachers.
Defined-benefit retirement plans are the most effective and efficient way for taxpayers to fund the retirement benefits for public school teacher
Based on conservative fiscal modeling of a typical teacher, i.e., one at the median age at both hire and retirement, it would cost taxpayers 40 percent more to fund a 401(k)-style plan (defined-contribution plan) to equal the typical pension benefit for a Kentucky Teacher.[1] A joint study by AARP and the National Retired Teachers Association found pension plans deliver retirement security at 48 percent lower costs to taxpayers than 401(k)-style plans.
Pensions are able to achieve higher investment returns and negotiate lower fees because they are managed by professionals on a daily basis. As a result of a pooled investment-management approach, pensions only need to save for the average life expectancy of a group of individuals rather than a single person, and therefore, it can invest more aggressively over a longer time period versus someone nearing or at retirement. Furthermore, due to its size, pension funds like TRS are able to negotiate lower investment-management fees and obtain access to many attractive alternative investments not offered by defined-contribution plans.
If you properly fund defined-benefit plans, they work
Defined-benefit plans are the most secure and reliable retirement plans for working families. The United States has several examples of public pension funds that are fully funded and working well for its members. States such as Wisconsin, South Dakota, Tennessee, and New York are funded above 90 percent despite experiencing an unprecedented financial crisis. The common characteristics of these successful pension systems is a commitment to properly funding them and strong investment and administrative management.
Every time Frankfort ignores its capital contribution to TRS, the negative impact to the system is doubled. Based on historical investment returns, for every dollar missed in capital contributions, TRS misses out on another dollar of investment income over the next ten years.
[1] Teacher Pensions vs. 401 (k)s in Six States: Connecticut, Colorado, Georgia, Kentucky, Missouri, and Texas; Rhee and Joyner UC Berkeley Labor Center and National Institute on Retirement Security.