Kentucky Labor Institute
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  • A “Business-Like” arrangement
    Posted On: Jun 26, 2015

    In more than 70 years of operations, KTRS has always provided retirement security to Kentucky's teachers and good value for taxpayers.  However, some in the media have characterized teachers' retirement annuities as being unduly burdensome on taxpayers and little more than expensive gifts and handouts.  History proves that these characterizations are simply wrong.  

        Rather than being a gratuity, retirement annuities are actually part of the compensation earned by teachers during their working years.  Furthermore, teachers actually participate in funding their retirement.  On every payday during their careers, teachers make mandatory contributions to KTRS that are matched by their employers.  Those contributions are invested and thereafter are paid out during retirement. In this way, most of the costs of retirement are paid from investment earnings (please refer to the KTRS schedule on page 2 of this article).  Across the nation defined benefit plans like KTRS pay about 70% of the costs of retirement with investment earnings.  This article sets forth some historical perspective about why the KTRS began operations and how it is "a business-like arrangement" for both teachers and taxpayers.

    THE PROBLEM 

        In the 1930s, the people of Kentucky and the rest of the world were suffering through the Great Depression.  The general distress of that period framed a more specific problem-Kentucky had an aging population of impoverished classroom teachers.  Newspaper accounts from that era indicate many of these teachers began their careers in one room school houses in the 1880s.  Their salaries averaged about $215 per school year.  Even during the Great Depression, these wages were regarded as below subsistence living.  

        A report prepared in 1936 by the Bureau of School Services of the University of Kentucky noted that school boards frequently felt an obligation to continue the employment of these teachers even after physical or mental disability had seriously reduced their efficiency in the classroom.  These teachers faithfully served their communities for 40 or 50 years (and in a few cases more than 60 years) and then became physically or mentally unable to perform teaching duties.  During their careers these teachers earned very little, had little or no savings, and were rejected from participating in the federal Social Security program.  

        The report by the University of Kentucky noted that having school boards caring for physically or mentally disabled teachers was unsuitable both educationally and financially.  The incapacitated teachers were not effectively teaching children.  Moreover, the school boards could not pay the wages of replacement teachers and also pay the physically or mentally disabled teachers.  The destitute teachers were dependent upon the charity of local school boards and often literally worked until relieved of their duties by death.

    THE SOLUTION

        The 1936 report by the University of Kentucky recommended establishing a teachers' retirement system as a solution to this problem.  The report emphasized that a teacher retirement system is not a "gratuity or charity," instead it is "a business-like arrangement whereby both the public and teachers make investments which return large dividends."  In essence, the report described a mechanism to defer small portions of compensation earned during teachers' careers, professionally invest those small amounts over long periods of time, and thereby achieve retirement security and protection from dependency.  The report noted that a retirement system protects society by helping to assure the orderly replacement of teachers choosing to retire after a specified period or retiring because of disability.  

        Following the 1936 report, the Kentucky General Assembly took action in 1938 to establish the Kentucky Teachers' Retirement System.  Thereafter, KTRS began operations on July 1, 1940.

    RETIREMENT SECURITY FOR THE LONG-TERM

        For some perspective on how far we have come since the 1930s, let's take a look at KTRS's operations from July 1, 1985 through June 30, 2011.  During this 26-year period, KTRS paid benefits totaling $16.4 billion.  During this same period of time, the investments of teachers' retirement monies earned $16.3 billion (truly remarkable considering stock market investment returns over the last ten years have averaged zero).  KTRS's pre-funded retirement benefits program truly exemplifies the idea set forth in the 1936 report that investing a small portion of teachers' salaries over their careers will return large dividends for retirement security.  

    Kentucky Teachers Retirement System

    Schedule of Funds Available for Retirement Benefits

    For the Twenty-Six Year Period Ending June 30, 2011

    Defined Benefit Plan – Retirement Benefits – (Pre-Funded)

    In Billions of Dollars

       

    Since 1940, KTRS has provided low-cost, high-quality retirement security for the teachers of Kentucky whether financial markets were tranquil or volatile, on the rise or falling.  Although there has been considerable turmoil in the global financial system over the last seventy years, KTRS's retirement program has always performed as "a business-like arrangement" for the teachers of Kentucky and the public they serve.


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