Sometime soon, presumably, Gov. Matt Bevin and his party’s legislative leaders will unveil Pension Reform 2.0.
It has, like Reform 1.0, been written in secret, but lawmakers must commit to fully vetting this version and resist any effort to rush it through.
There’s too much at stake, for all Kentuckians. The state, cities and counties are on the hook for billions to make up for the shortfalls in several public pension systems. If there is no new revenue — either from a massive upswing in the economy or expanded taxes or a combination — virtually every public service is in line for severe cuts.
As serious as this is, Bevin has pushed the panic button rather than seek reasoned approaches, including increasing revenues. He’s stoking the sense of crisis to justify abandoning traditional pensions in favor of individual retirement accounts that will leave most poorer at the end of their working years.
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Lawmakers must not allow themselves to be manipulated into enacting “solutions” that will leave Kentucky and Kentuckians poorer.
Panic is rarely a useful tool for addressing complex public problem. Solving this crisis requires rigorous analysis, thoughtful long-term planning, a commitment to accountability and transparency, and more money.
Legislators must keep in mind:
▪ Not all public pension systems are in the same boat. The largest system — Kentucky Employees Retirement, non-hazardous — is drastically underfunded, with only 13.6 percent of the money it’s expected to need. The County Employees Retirement Systems, non-hazardous (which also covers many city and town employees), however is 52.8 percent funded, and the Teachers Retirement System is 56.4 percent funded.
▪ Transitioning new employees away from pensions with guaranteed benefits to individual retirement accounts will make the problem worse. Here’s why: Pension systems need a constant inflow of cash to pay out benefits. In healthy plans that comes from payments by current employees and their employers. With that cash flow, the investments can grow, providing a solid cushion against market downturns. If new employees are moved out of pensions and no longer pay in, there will be less cash to pay retirees, leaving the government to make up the difference, and damaging the ability to invest for the long term.
▪ The “level dollar” approach to paying down the liability proposed in the first reform bill unnecessarily punishes state and local budgets. Here’s why: The idea is to agree on a number a pension is underfunded, then agree on a number of years to make up the shortfall and make equal dollar contributions each year. Kentucky currently uses the more common approach of contributions based on a percent of total wages. This approach allows contributions to grow as wages grow. Imposing payments today at the same dollar amount as for 15 and 20 years in the future burdens current budgets of governments and public institutions unnecessarily.
▪ Pensions make more sense than mutual or index funds because they spread risk over more people and years. When people pool resources under professional management for long periods of time they get better, safer returns with lower management costs than individuals can achieve on their own.
▪ Finally, retirees are taxpayers and citizens who use services. Transitioning to systems that will make them poorer in the future will only place more demands on public services, stress families and reduce tax revenues.