Legislators campaigning to hold on to their seats may be jittery about dealing with controversial pension reform, but the problems plaguing the state’s retirement systems don’t hibernate just because there’s an election.
Despite record amounts of funding in recent years, the ailing Teachers’ Retirement System (TRS) is saddled with $14.5 billion worth of liabilities, remains under 60% funded and had a negative cash flow last year of about $300 million.
Some critical steps to improve the TRS – particularly in areas of widespread agreement – can and should be taken during the 2020 legislative session.
It’s generally accepted that while benefits already earned should be funded at the levels promised, the inviolable contract between the state and its teachers doesn’t prevent any future changes.
Some of the changes made earlier this century – when the number of unused sick days which can be accrued during an entire career and applied to beneficiaries’ final year of compensation was reduced from 400 to 300 without any successful legal action stopping it – suggests that Kentucky’s inviolable contract with teachers doesn’t legally prevent modifications to future benefits.
In fact, there can be no guarantee in defined benefit pension systems like the TRS that future benefit levels will remain as high as past ones.
After all, how can future benefit levels be promised before actuaries even have the chance to look at how the system performed the previous year in order to determine affordable benefits while avoiding harmful liabilities down the road?
The primary reason Kentucky faces a huge $48 billion pension liability is because workers and teachers are promised that future benefit levels will remain at the high levels of the past.
While this practice makes everyone feel warm and fuzzy – like we’re doing something to help our teachers – the problem is that such promises are made before it’s even known whether TRS can actually afford to keep them.
Not being able to fund them ultimately weakens the system, which certainly doesn’t help beneficiaries or retirees.
While many Kentucky teachers retire with similar salaries after 27 years, their pension payments vastly differ because of the sick-day policy.
Not only do teachers upon retirement receive compensation for 30% of the value of their unused sick days over a career, but that same amount is applied to their final year’s salary.
This practice spikes some pensions by as much as $20,000 annually since retirement payments are determined using the three years in which teachers’ salaries were the highest.
Actuaries cannot possibly know how much money will be needed to cover these various accounts.
The burden on TRS grows as retirees increasingly live longer and collect benefits enhanced for a lifetime.
Even $5,000 in additional pension compensation each year for a teacher who retires at 55 years of age and lives until 80 will cost the state an additional $125,000 for which no additional contributions or investments were made.
Nothing in the state’s inviolable contract prevents a more reasonable and less-costly approach that still provides a reward for not using sick days while relieving strain on the system.
Both sides of the political aisle should be able to agree – even in an election year – that it’s sensible to offer a generous payment to retiring teachers for not using these days while ending the insensible practice of allowing such compensation to spike pension payments forever.
Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. He can be reached at jwaters@freedomkentucky.com and @bipps on Twitter.
You should not tear down a bridge until you know why it was built. The use of accumulated sick days to improve Retirement was instituted to encourage teachers to save them rather than use them up frivolously. This is because qualified substitute teachers are difficult to find and if there is no incentive to save sick days teachers quite sensibly will use the ones allotted to them annually rather than lose them with no benefit. Your so called solution will only exacerbate an already difficult situation of finding qualified Subs and this in an environment where there is already a teacher shortage. Jim Waters is a typical CEO who wants to solve a problem at the expense of his labor force rather than addressing the fact that the state needs more revenue and has more than ample sources to collect it from the top income earners in the state who, by the way, got their top income tax rate reduced last session while the teacher pension exclusion was reduced forcing teachers to pay more in state taxes. It’s you and your fat cat CEO’s turn to ante up, Mr Waters.
First of all, every industry in the nation is suffering from a labor shortage from remedial jobs to high level managers.
Second of all, any perceived shortage of teachers would also be in part due to the fact the fake system that was and very much now still is run horribly corrupt for decades has forced them (no matter what, in the very near future) to start cutting pensions and benefits because it can’t sustain itself.
Third of all, another perceived shortage of teachers would also be in part due to the fact they are choosing to leave the profession or not enter since public schools are run like free for all day cares where a teacher cannot to any legitimate degree control or discipline children without fear of being fired, on the news, or reprimanded by their principal (the issue partially lies in horrible parents, but still, the kids should not be allowed to run the class room.) I know many teachers and they HATE the fact they cannot stand up to or discipline kids at all, and it’s only getting worse every year. Even at the best schools in the NKY counties teachers are trampled by students and you have teachers leaving.
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Fourth of all, the fringe benefits outside of a pension and the hours worked by teachers far outweigh any industry average. Their healthcare costs for one are insanely low, and if they pick up a job in the summers and over winter break (anywhere is hiring part time right now for easily $18-20/HR if you’re a half way competent person), they would make a load of money beyond the average income. (on average if they worked during their breaks a teacher would make close to $65k per year). And don’t pull the “boo hoo, I’m a teacher and work hard and should be entitled to breaks”. No… everyone else that works private sector with 10 times more risk and stress in their job duties works year round, often 6 days a week doing side jobs, and a break of more than a week would be laughable…
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The entire system is inevitably going to come crashing down because the Teacher’s Union has brainwashed their minions into not negotiating and not budging an inch when it comes to pensions or benefits or sick days, so the Union can continue to stuff their pockets at the teacher’s expense.. In the real work when something is broke you fix it. In the government world when something is broke, you break it even more until the system crashes, and the tax payers are then forced to fund it’s restart and the cycle repeats… Facts over Feelings/Emotions is the only way to save the system, period.