Opinion: Three persistent myths about Kentucky’s teacher pension system

Editor’s note: Chad Aldeman is a principal at Bellwether Education Partners and the editor of TeacherPensions.org. Kirsten Schmitz is an analyst with Bellwether Education Partners. With growing political polarization and partisan sniping entering the pension discussion, this column offers an analysis of some of the myths regarding pension reform.

By CHAD ALDEMAN & KIRSTEN SCHMITZ
Guest columnists

CHAD ALDEMAN

Monday, Oct. 23, 2017 — As debate over Kentucky’s pension systems unfolds, three popular arguments about teacher pensions keep sprouting up in opposition to change. Like any good myth, there’s a kernel of truth to each one, but the full story is more nuanced.

MYTH 1: Kentucky’s current pension system is providing adequate retirement benefits for workers. The popular narrative of pensions being some sort of mythical, gold-standard, ironclad beacons of retirement security no longer holds up—if it ever held up at all. It’s certainly true that the system works well for some workers, but only those who are able to stay for an entire career.

Currently, all Kentucky public school teachers are enrolled in a defined benefit pension plan through Kentucky Teachers’ Retirement System (KTRS). This plan delivers benefits through a formula that is extremely back-loaded, and a young teacher just starting out in her career must teach for 27 years before she’s eligible to retire. Kentucky’s own actuaries estimate that most teachers won’t stay that long. Of course, teachers who do last that long get a pretty good deal, but most Kentucky teachers get far less.

Worse, unlike most states and all private-sector workers, Kentucky’s teachers aren’t enrolled in Social Security. They don’t have access to the nationally portable, progressive retirement benefit which all other workers might take for granted. Without Social Security as a baseline of benefits, Kentucky teachers are even more exposed to the poorly structured, back-loaded state pension plan.

MYTH 2: Pensions are an effective retention tool. Kentucky, like all other states, bases its financial assumptions on how many teachers it thinks will leave at various points in time. In Kentucky, teachers first become eligible for a pension after serving for five years. If pensions had an effect on the workforce, some four-year veterans should stick around just to qualify for a pension. But according to the state’s own financial assumptions, pensions alone are not enough of an incentive for teachers to stick around.

KIRSTEN SCHMITZ

When researchers have looked at this in other states, they’ve found that pensions do exert a limited “pull” effect to keep late-career teachers in the classroom as they near the state’s normal retirement age. But there’s a much larger “push-out” effect that encourages effective, veteran teachers to leave right when they hit the state’s retirement age. We see this in Kentucky as well.

All told, when other states have shifted away from defined benefit pension plans, teacher turnover has not risen and has in fact gone down for older, experienced veterans.

MYTH 3: Pensions are more cost-effective than 401k-style defined contribution plans. Just this week the Kentucky Public Pension Coalition and the Kentucky Retired Teachers Association paid for a report repeating this claim. But they arrived at their results by ignoring two key things. First, they look only at benefits paid out to 30-year veteran teachers. That’s an important group of workers, to be sure, but as we noted above, they’re also relatively rare. The vast majority of teachers who only stay for 5, 10, or even 20 years get disproportionately small retirement benefits.

Second, this claim conveniently overlooks the debts being accrued by defined benefit pension plans. Years of mismanagement and can-kicking have left Kentucky’s plan deeply in debt – KTRS alone has an unfunded liability of $16.8 billion, and has set aside just 45 percent of what it has promised to teachers and retirees. Last year, the state paid about five percent of its entire budget just to KTRS, mainly to pay down these debts. The pension system is sapping resources that should be going to today’s students and teachers, but it certainly looks cheaper when you ignore those costs.

Kentucky Governor Bevin’s recent proposal would move the state closer to a solution. It would keep promises made to current teachers and retirees, and would help the state pay down its existing debt in a more responsible manner. At the same time, it would prevent the state from taking on any new debt, and enroll new hires in a generous defined contribution plan more suited to Kentucky’s teacher workforce.

Tackling pension reform will be difficult. It’s complicated, and no proposal can wipe away the existing debt. But without intervention, Kentucky’s schools, teachers, and students will continue losing out on critical resources. The state has an opportunity to keep its promises, stop sliding deeper into debt, and provide all new Kentucky teachers with a path to a secure retirement, not just the ones who stay for a full career.

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