The blame game will heat up as Gov. Matt Bevin gets closer to calling a special session, likely for October, to address public pension woes. But as Bevin and legislators tackle this serious problem, they’ve got to steer clear of fantastic claims about rich retirement benefits and simple solutions.
There are no magic bullets. The state must commit to the long slog of funding the pensions to honor current obligations and assure talented, dedicated people will be drawn to public service careers in the future. A few facts to keep in mind:
▪ Changing benefits for future employees will do nothing to solve the current crisis.
▪ A $20 billion-plus unfunded balance, by the latest count, is almost exclusively due to decisions by legislators and governors over the past two decades to balance budgets or fund pet projects by shortchanging contributions to the pension fund.
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▪ Almost 60 percent of retirees in the Kentucky Employees’ Retirement System receive less than $20,000 a year.
▪ Dozens of studies, and the experience of some states, show that switching to a 401(k)-type system will save the state no money, cost employees more and leave state employees with less in retirement.
▪ About 500,000 people are directly affected by the retirement systems grouped under KERS.
▪ Digging a deeper pension hole — a likely result if new employees are switched to a 401(k)-type system — could push a teetering state budget over the edge.
After years of severe cuts resulting in escalating university tuition, underfunded public schools, diminished staffs at critical agencies and a host of other problems, revenues are not meeting estimates and the rainy-day fund is perilously low.
The Kentucky Chamber of Commerce and others endorse switching from guaranteed benefit pensions to 401(k)-type funds with individual accounts funded by contributions from the employee and the government. That’s a bad idea for both the state and employees.
For the state, it would mean closing the pension system — new employees wouldn’t make contributions. Now, funds come from employees, the state and investment earnings. If new employees no longer contribute, that means less money to invest as more workers retire.
That might work if the system was fully funded when it’s closed, but with about 14 percent of the money on hand to cover current obligations it’s a recipe for disaster.
Those new employees would have individual accounts with higher fees and, studies repeatedly show, lower returns. At retirement they would have less to fall back on, even though both they and the state may have paid in roughly the same as in the current system.
The reason is simple: There’s power in numbers. When a state retirement fund brings billions to the market, it pays lower fees on investments. It can also spread risk among thousands of people retiring at different times, providing a longer horizon for investment. Individual accounts don’t have those advantages.
Republicans assert they rely on facts and economic realities to govern conservatively. Now, controlling the governor’s chair and both houses of the General Assembly, they will put themselves to the test on the pension issue.