What lessons can the rest of the country learn from the Bluegrass state regarding pensions?
Consider: Kentucky has a budget of $11 billion per fiscal year. Tax breaks are $13 billion per fiscal year. The pension shortfall is estimated at $33 billion, primarily because the state legislature under both Republican and Democratic leadership did not pay the agreed-upon share. The employees have paid in their share.
A fair solution would be to suspend the tax breaks for three years, saving $39 billion. That would pay the $33 billion shortfall in the pension plans and leave $6 billion to make up for all the underfunding to state agencies in the past decade. With the current budget shortfall projected at $200 million, it would put Kentucky back on its feet.
However, the governor hired a consultant, PFM Group, and naturally the consultant said the solution is to force future employees into 401(k) plans that often fail to provide secure retirements, and cut into benefits that employees have earned.
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The average government retiree earns $16,161 a year and the average teacher retiree earns $36,244 a year, according to the Courier-Journal. These amounts do not equal living off the fat of the land.
State employees are key members of the middle class; they are fundamental to the economy. They don’t make a lot of money, but the work is steady and they traditionally have good benefits to make up for that lack of a high salary. They drive the economy because they have to spend to support their families.
There is no upside to driving down their pensions because we need them during retirement to drive the economy and they have earned the right to be comfortable after their work lives are over. It would be a mistake to imitate private-sector compensation methods. Most private-sector employees are under-compensated.
So what happens when pensions are not properly funded? For one thing, the bond rating of the state goes down, as it did in July. Then, naturally, people who describe themselves as conservative claim that state employee pensions are taking money away from education.
They never say that Kentucky is short of money because the wealthy and corporations have not paid their fair share. Or that tax breaks are so massive that the state has been cutting and cutting the budget for a decade.
Here are other steps Kentucky should take:
1. Ensure the legislature makes its actuarially required contribution to the pension plans.
2. Revise the corporate and personal income tax so that the wealthy and corporations pay their fair share.
3. Get completely rid of the tax breaks.
4. Take the best-funded judicial and legislative pension plans and combine them with the three most poorly funded plans. It is wrong that legislators and judges have better funded plans than other state employees.
5. Recognize that defined-benefit pensions — which pay a retiree a set amount based on pay and the number of years worked — are key to maintaining a healthy economy.
There are lessons to learn from every state, even Kentucky.
K.A. Owens of Louisville is a community organizer, public speaker and writer.