Under a new Republican proposal to overhaul Kentucky’s pension systems, most state workers hired since 2014 would no longer get a guaranteed return on their retirement investments in the event of a poorly-performing stock market.
Under the “hybrid cash-balance” plan provided under the new pension bill, lawmakers have only pledged that the accounts won’t lose money during a market downturn.
“It basically shifts more of the risk over to the employee for the investment returns compared to the current plan,” said Jason Bailey with the Kentucky Center for Economic Policy.
The cash-balance plan unveiled by Republican leaders of the legislature on Tuesday evening requires the state and worker to make monthly contributions to a workers’ retirement account.
Contributions are then put in an investment pool with other state workers which the state’s retirement agencies would manage.
Since January 1, 2014, new state workers in “non-hazardous” jobs have been enrolled in a cash balance program that guarantees a minimum four percent growth of their retirement investments, plus capture of 75 percent of any investment returns on top of that.
The new proposal sets a floor for retirement investments — returns wouldn’t be able to go below zero percent rate — and workers would be able to keep 85 percent of investments above that.
According to a release distributed by Senate Republican leaders, the remainder of the net investment return would be retained by the pension systems to keep accounts level during economic downturns.
Teacher Changes
Future teachers would also be included in the new cash-balance plan instead of receiving the more-generous defined benefit pensions that guarantee payments aided by yearly cost of living adjustments during retirement.
Bailey said that’s an especially big reduction for teachers.
“This plan is supposed to replace Social Security, which they’re not in, which has an annual adjustment. So they won’t be in a plan that has that, that’s a big difference,” Bailey said.
The bill eliminates the so-called “inviolable contract” for new teachers, meaning lawmakers would be able to adjust their retirement benefits at any point in the future.
Retired teachers’ cost of living adjustments would also be cut in half for 12 years, from 1.5 percent to .75 percent under the proposal. That would affect current retirees for the next 12 years and future retirees for the first 12 years of their retirement.
Teachers who haven’t worked for 20 years will have to work for 35 years and be at least 60 years-old to earn “enhanced” retirement benefits. Currently, teachers can receive the enhanced benefit after 30 years.
Future teachers also wouldn’t be able to enhance their final pension benefits by accumulating sick days. Current teachers will continue to be able to do so, but would have their sick days capped for retirement purposes starting July 1 of this year.
All state workers wouldn’t be able to use their accumulated sick days as credit to more quickly reach their date of retirement.
Going Forward
The cash-balance plan is a departure from Gov. Matt Bevin’s proposal to move most future and some current state workers onto 401(k)-style retirement plans, which have no guaranteed rate of return and could even lose money during a market downturn.
The new plan also doesn’t include Bevin’s plans for current state workers to be transitioned into 401(k)s once they reach 27 years of service or for all employees to contribute three percent of their salaries for the retiree health program.
House Speaker Pro Tem David Osborne, a Republican from Prospect, said the new plan is a better alternative than Bevin’s.
“It does offer that stability, it offers guarantees, it offers the ability for upside in good markets, protects it during down-markets,” Osborne said.
Osborne also said the cash-balance plan is advantageous to defined-benefit pensions because employees can take them to other jobs if they ever leave state government.
Sen. Joe Bowen, a Republican from Owensboro and the bill’s primary sponsor, said he imagined the bill would be well-received by state workers.
“I can’t imagine there being a lot of push back on this,” Bowen said. “We’ve made, I don’t want to call them concessions, because they’re just sound decisions that we made. They’re fiscally responsible decisions.”
Senate Majority Floor Leader Damon Thayer said the bill could be considered as early as Wednesday, Feb. 28 at the next meeting of the Senate State And Local Government Committee.
