A proposed overhaul of Kentucky’s public pension systems will not shift any existing or future employees into a mandatory 401(k)-style retirement plan, Senate President Robert Stivers said Wednesday.
New teachers will have a choice of several retirement plan options, including a traditional defined-benefit pension plan and a hybrid “cash-balance” plan, under a long-awaited pension bill state lawmakers hope to unveil next week, Stivers said.
A hybrid cash-balance plan, which is less generous than a traditional defined-benefits pension, offers more retirement security than a 401(k)-style defined-contribution account.
The Republican from Manchester also said the bill will not include a five-year freeze on cost-of-living increases for retired teachers, as Gov. Matt Bevin proposed last year.
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Bevin, a Republican, called for a switch to 401(k)-style accounts for new teachers and state workers in a proposal he unveiled with GOP legislative leaders last October to help stabilize the state’s ailing pension systems, which face more than $40 billion in unfunded liabilities. But rank-and-file lawmakers rejected Bevin’s plan after facing protests from teachers in their home districts.
Bevin wanted to call a special legislative session last fall to alter the state’s public pension systems, but that did not materialize. Lawmakers then had hoped to address the issue early in this year’s regular session but Wednesday marked the halfway point of the 60-workday session.
Stivers said it has taken time to project the costs of the bill, with its various options, and that legislative staffers were checking references in the bill to other state statutes. That’s why the bill probably won’t be made public until the first of next week, he said. Stivers had said on Tuesday that the bill would likely be released this week.
House Speaker Pro Tempore David Osborne, R-Prospect, said he would not talk about any details of the bill until it has been filed.
Stives said future teachers will have several retirement options from which to choose, including a defined-benefit pension and a hybrid cash-balance plan. He did not identify others.
“There are going to be some voluntary choices in here,” he said.
In a defined-benefit system, an employer provides a specific monthly pension payment for life based on a variety of factors, such as an employee’s earning history, tenure and age. Employees also pay into the system.
In a defined-contribution system, employees must save enough money from their pay, sometimes matched by contributions from their employers, to carry them through their old age. Unlike traditional pensions, the money can run out in a defined-contribution pension plan.
A hybrid cash-balance plan has some characteristics of both a defined-benefit plan and a defined-contribution plan. It resembles a defined-contribution plan because it determines the value of benefits for each participant based on the value of an individual’s account. However, the assets of the plan remain in a single investment pool, like a traditional defined-benefit plan, and the employer guarantees a minimum return on investments.
Like a defined-benefit plan, it uses a specific formula to determine benefits, which can be taken in a life-time annuity.
According to the Kentucky Retirement Systems website, all state and county full-time employees with non-hazardous jobs who began participation with the retirement systems after Jan. 1, 2014, contribute to a cash-balance plan. Participation is mandatory.
Members and employers contribute a specified amount into the member’s account, which earns a guaranteed amount of interest at the end of each fiscal year. Depending on investment returns, there may be an additional interest payment added to the member’s account.
All interest is paid on the preceding year’s balance so there is no interest paid in the member’s first year.
When a member is eligible to retire, the benefit is calculated based on the member’s accumulated account balance. A member earns service credit for each month they contribute to the cash balance plan.
The average pension benefit for a retired state government employee in Kentucky is $16,161, according to 2017 state data. For school teachers, who do not collect Social Security retirement benefits and must have advanced college degrees, it’s $36,244.
No decision has been made yet about whether the bill will be filed in the House or Senate, Stivers said. He also said Republican legislative leaders want to “sit down with our colleagues in the minority party” for their input.
Stivers called the still-secret bill “a good piece of legislation.”