Kentuckians have yet to see the public employee pension “reform” bill that Gov. Matt Bevin and the General Assembly’s Republican majority hope to railroad into law during a special session this year that has yet to be scheduled.
But Bevin and GOP leaders outlined their ideas at a Frankfort news conference Oct. 18 that left many questions unanswered. Among them: Where do they plan to get the money to pay down more than $30 billion in unfunded pension obligations?
They did make a couple of things clear, neither of them good.
First, public employees and retirees will see benefit cuts to solve problems they didn’t cause. Kentucky’s pension woes are the result of years of over-promising and underfunding by the General Assembly and previous governors. Also to blame: Secrecy and mismanagement by pension administrators and their investment firms.
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But the big takeaway from the Republican plan is to move future state employees, except for those in “hazardous” occupations, from defined-benefit pension plans to defined-contribution plans.
In other words, they want state employees and teachers to have lousy retirement plans like those that most of us who work for private companies have been forced to accept.
Defined-contribution plans, popularly known as 401(k) plans, were not designed to replace traditional defined-benefit pension plans. They were created in 1978 so higher-income people could pad their retirement savings while paying less in taxes.
But since the 1980s, most companies have shifted employees to these plans for one big reason: They save companies money and shift the financial burden to employees, whose retirement security is tied to the whims of the stock market.
Heavy reliance on defined-contribution plans and individual retirement accounts has helped create a national retirement savings deficit of between $6.8 trillion and $14 trillion, with four out of five working families having less than a year’s worth of income put away for retirement, according to a 2013 study by the nonpartisan National Institute on Retirement Security.
As a result, the percentage of Americans 65 and older still working has risen from 10.6 in 1986 to 18.6 in 2016, according to the U.S. Bureau of Labor Statistics. For one-third of all Social Security recipients 65 and older, those benefits, which have lost one-third of their buying power since 2000, represent at least 90 percent of income.
This trend was examined in heartbreaking detail in a recent Washington Post story that profiled elderly couples living in camper vans and traveling for low-wage jobs. “I’m going to work until I die, if I can, because I need the money,” a 74-year-old man, who had gone from Indiana to Maine for a $10-an-hour job, told the reporter.
In trying to sell their pension plan, Republicans will pit state workers and retirees against other taxpayers. Call it the “misery loves company” approach. Most private-sector workers and retirees have less-generous retirement packages than public employees, although their working wages were probably higher for similar jobs.
But there is a lot of research showing that shifting public employees from defined-benefit to defined-contribution plans is a bad deal not just for those retirees, but for everyone — except the investment firms that get a lot of new clients.
The Kentucky Center for Economic Policy, whose research has an excellent record for factual accuracy, found that switching from the current state pension system to pure defined-contribution plans would cost taxpayers more money to administer while delivering inferior benefits.
Teachers would be left especially vulnerable. Because they don’t participate in Social Security, they would be among the few American workers with no defined-benefit protection in old age.
Taking state workers out of the current system would make it more costly to pay off the accumulated liability. Plus, the new retirement plan would make it harder to attract good state workers, forcing government to pay higher salaries.
Retirees with a lot of disposable income do a lot to help boost Kentucky’s economy. Retirees with little disposable income are a drag on the economy, because they need more taxpayer-funded social services and benefits.
Many states, including Kentucky, have gone to hybrid pension plans in recent years, but only two states, Michigan and Alaska, have forced virtually all new hires into pure defined-contribution plans, as Bevin and GOP leaders want to do. The result has been higher costs, lower benefits and a worsening of unfunded liabilities.
West Virginia tried it for teachers in 1991 and saw similar results. So, in 2003, that state reopened the defined-benefit plan, and 78 percent of teachers switched back.
So before the Republican pension “reform” train gets rolling too fast, Kentucky taxpayers should ask a simple question: Where have their ideas actually worked?