Kentucky Public Pension Reform

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Defined Benefit (DB)

This is a pension plan under which an employee receives a set monthly amount upon retirement, guaranteed for their life or the joint lives of the member and their spouse. This benefit may also include a cost-of-living increase each year during retirement. The monthly benefit amount is based upon the participant’s wages and length of service. A defined benefit plan is sometimes referred to as a fully funded pension plan

Advantages of Defined Benefit

  • The plan guarantees retirement income for members
  • Members do not have to incur an investment risk individually
  • Cost of living adjustments
  • Not dependent on the participant's ability to save

Disadvantages of Defined Benefit

  • Difficult to understand by participant
  • Plan does not benefit employees who terminate employment before retirement

Defined Contribution (DC)

This is the type of retirement savings program under which an employer promises certain contributions to a participant’s account during employment, but with no guaranteed retirement benefit. The ultimate benefit is based exclusively upon the contributions to, and investment earnings of the plan. The benefit ceases when the account balance is depleted, regardless of the retiree’s age or circumstances. Examples of such plans are 457, 401(k), and 403(b) plans.

The Utah Education Association notes that DC plans are unreliable vehicles for ensuring retirement income security because of leakage. Leakage refers to the loss of assets before retirement to such factors as loans (especially those that are not repaid by the participants) and by cashing out retirement savings when they change jobs (rather than leaving them in the existing plan - or by rolling them to an Individual Retirement Account or to a future employer’s retirement plan). Studies consistently indicate that half or more of terminating participants fail to retain their retirement assets in a retirement savings account.

Timing is critical to the success of a DC plan. If a member retires in a down market, the funds withdrawn will reduce the principal upon which the member was relying to produce future investment earnings, resulting in either lower monthly income or a shorter period of retirement income. Also, at the bottom of a market cycle employees may not be able to afford retirement, regardless of their age or health.

Advantages of Defined Contribution

  • Retirement savings are tax deferred
  • Members usually have discretion on how much they want to save
  • Can be funded through payroll deductions
  • Lump sum distributions may be eligible for special 10 year averaging
  • Members can benefit from good investment results
  • Easier to understood by participants

Disadvantages of Defined Contribution

  • Difficult to build a fund for those who enter the workforce or start the plan late in life
  • Members bear investment risk

In Kentucky

According to the Kentucky Retirement Systems(KRS), the retirement plans administered by KRS are qualified public defined benefit plans and were established under Section 401a of the Internal Revenue Code (IRC). Benefits are based on a formula, rather than on an account balance. The formula used to compute KRS benefits provides participating members with a guaranteed lifetime payment at retirement based on the number of years of service, your average salary and a multiplying factor.

The formula for retirement benefits is:

Final Compensation X Benefit factor X Years of service

Also, Kentucky offers Deferred Compensation Plans such as the 457 plan and 401(k).

Kentucky Pension Reform

Kentucky is facing a budget crisis and a pension plan crisis for Kentucky State workers. Much of the budget crisis has to do with welfare expansion and pork barrel spending and of course raising the pensions of state legislators. The executive and judicial branches in Kentucky have pensions and salaries that are burdening the Kentucky tax payer. Their pension plans and salaries are excessive. Kentucky is facing a $1 billion budget shortage, but legislator’s pensions will increase from $759, 158 to $4.28 million over the next two years. This is according to a report released by the Kentucky actuarial report on the Kentucky Legislators Retirement Plan. Half of the $4.28 million will be beneficial to 30 current and retired legislators (Steitzer, 2009). The Kentucky state General Assembly in 2005 changed state law to allow Ky state Congressman who accept jobs with the state to use their higher, non-legislative state salaries to decide their Congressional state pension. This is because state congresses jobs are part time, and this means low salaries in some cases not more than $20,000 a year. Salaries in the state Judicial and Executive branches go up to the six figure range. This is wrong on many levels. First it is morally wrong, it also is one of the major reasons we are bankrupt as a state [1]. Giving out millions more in legislative pensions could be a bad choice politically since elections are coming up soon. This year lawmakers will be making a new two year budget, and they will have to take out hundreds of millions from an already slim state spending plan. But you can be sure they won’t cut it from the state legislators pension plan. Reforms are needed to fix Kentucky’s public pension system. Sky rocketing retirement rates are severely hampering our budget. If the Kentucky state pension system is reformed it will be curbing unsustainable pension costs. The County Employee Retirement System specifically needs to be reformed. [2]

Two tax measures will be proposed in the interim joint Committee on appropriations and Revenue in June. HB 51 PHS is a bill that is backed by Representative Bill Farmer and it will wipe out the personal and corporate state income tax giving Kentuckians a sigh of relief. It will affect all Kentuckians, rich and poor positively. Consumer prices in Kentucky will go down since the Kentucky state corporate tax is being repealed. More Jobs will be created for Kentucky because of the elimination of Kentucky State’s corporate tax. Wealthier Individual will have more money to invest in Kentucky’s future. Representative Jim Wayne introduced HB 62, which would burden the middle and upper class, while extending welfare to the indigent. More jobs would be lost because the corporate state tax in Kentucky would be increased. Because of the pension and budget crisis Kentucky has to find a way to create more revenue and cut spending. They would like to do this without raising Kentucky taxes. We have a $996 million budget shortage for 2010, and this is according to the Commonwealth’s Consensus Forecasting Group. “HB 51 PHS, a bill backed by Representative Farmer repeal’s the Commonwealth’s personal and corporate income taxes as well as its limited liability entity [3] Data from Legislative Research Commission demonstrate that HB 51 PHS will generate; Additional revenue in fiscal year 2010. “HB 262 / HB 223, the bill sponsored by Representative Wayne would raise income tax rates for well-to-do Kentuckians; create a new income tax credit based on the Federal Earned Income Tax Credit (EITC); reinstate a version of Kentucky’s estate tax; and also subject a variety of services to the sales tax”. This would be disastrous to the Kentucky economy. The prescription for success in a recession is to lower property, estate taxes or get rid of corporate and personal income taxes and shrink the welfare budget. Spending more on welfare and raising personal and corporate taxes is a sure prescription for failure.


  1. Steitzer, S. (2009). Taxpayers to get bill for Legislative Perk. Courier Journal
  2. Cities, K. L. (2009). Legislative Agenda at a Glance. Kentucky League of Cities .
  3. Policy, I. o. (2009). Tax Reform in Kentucky. Institute on Taxation and Economic Policy .

See Also