Trying to persuade teachers they’d be better off retiring with individual accounts than a guaranteed pension, the governor’s office offered a rosy story.
We’re not convinced.
Bevin’s scenario assumed a teacher worked for 37 years, always contributing the maximum 12 percent of pay (9 percent would be required), that the state and local school districts would always match that at 4 percent and 2 percent respectively, and the money would earn 7.5 percent annually, leaving the teacher with $1.59 million at retirement.
It’s possible this could happen if the state and local school districts pay their share (there’s nothing in the governor’s proposal to prevent employers from lowering or eliminating their contributions, as many in the private sector have done), and if a teacher could give up 12 percent of pay every year of her career, and if she’s an excellent and lucky investor.
But it’s not likely.
Here’s why: Usually only the wealthiest workers — Kentucky teachers? — can afford double-digit savings plan contributions. Vanguard reports that last year average contributions to its plans were 6.2 percent of pay.
And that 7.5 percent return? Well, Dalbar, a leading independent analyst of investment performance, calculated that individual equity mutual fund investors achieved an average annual return of 3.66 percent in the 30 years ending Dec. 31, 2015.
Millions of private sector workers have been forced out of pension plans and into 401(k) plans similar to the governor’s proposal. They are much poorer than Bevin’s mythical retired teacher. The average retirement savings for working age families, according to a recent report by the Economic Policy Institute, is $95,776. The 56 to 61 age group has the highest average, $163,577.
Many Kentucky teachers, who can’t participate in Social Security, would retire into near-poverty, as happened in West Virginia when it switched from pensions to individual savings (it has since switched back.)