How states are changing teacher pension plans

These teachers work extra jobs to pay the bills
These teachers work extra jobs to pay the bills

Starting next year, new teachers hired in Kentucky probably won't get a traditional pension.

Neither will new teachers in Pennsylvania. Pensions are already a thing of the past for teachers in Michigan, Rhode Island and Tennessee.

In most cases these teachers are offered what's called a hybrid plan, which combines elements of a traditional pension and a 401(k)-style account. Generally, they shift more of the investment risk to the workers.

"We've been seeing about one state a year add a hybrid plan," said Keith Brainard, the research director at the National Association of State Retirement Administrators.

Sometimes it's for state, county and local workers. Sometimes it's for teachers.

A hybrid plan isn't the only way to shift investment risk from states to employees. Forty-eight states have passed some kind of pension reform since the market crash in 2008, according to the National Institute on Retirement Security.

The majority of states both reduced the payouts for new hires as well as increased the amount workers must contribute for current retirees, a report from the group says.

Related: Kentucky teachers flood state capitol

The idea behind these changes is to use cost savings to help pay down unfunded liabilities. States face a $1.1 trillion pension shortfall, according to The Pew Charitable Trusts. Many haven't fully made up for investment losses during the last recession, and some states haven't made the contributions required to keep the plans fully funded.

Kentucky, for example, paid less than half of what was required in 2015, the Pew Charitable Trusts report said. The state's pension plans for teachers and other public workers are just 38% funded, followed only by New Jersey at 37%.

Kentucky Governor Matt Bevin applauded lawmakers who voted to stop "kicking the pension problem down the road," indicating he will likely sign the bill passed by lawmakers last week.

The new retirement plan for Kentucky teachers will act like a pension. Everyone must participate, and the money is pooled and invested by a professional. But the payout amount is based on investment returns, rather than a guaranteed portion of a worker's salary.

Kentucky state and local employees hired after 2014 have already switched to this kind of plan.

Related: 3 things teachers need to know about saving for retirement

Critics worry that hybrid plans will lead to significantly lower benefits, which could be detrimental to those in a state like Kentucky where teachers do not pay into Social Security.

"Pensions are also an important retention tool. This is ultimately going to affect the quality of education children get," said Diane Oakley, Executive Director of the National Institute on Retirement Security.

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