Governor Bevin’s proposed pension reform, while well-intentioned, propels Kentucky forward in a race to the bottom when it comes to fiscal soundness, retirement security and quality of education in our state. It doesn’t have to be this way.
The proposed reforms leave in place the huge unfunded liability of anywhere from $33 billion to $84 billion. The General Assembly and local governments will have to find about $1 billion and $400 million, respectively, of additional revenue (taxes) or spending cuts each year, causing additional strains on our beleaguered public institutions and services. Our impoverished state, full of talented and industrious citizens, will only be further impoverished. When the next downturn in the economy occurs, our bond ratings will be further reduced.
Forcing all new non-hazardous employees into 401(k) or similar plans means a key component of retirement security and an essential feature of public service will be gone. History tells us that for most workers, 401(k) plans are inadequate. Indeed, the median 401(k) plan in the United States contains only $17,000 for workers aged 56-61.
And now there is significant discussion in Washington about limiting 401(k) deductions for tax purposes to $2,500 annually, which would limit the plans’ usefulness even more.
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“Defined benefit” pensions are valuable assets for our state and its citizens. Indeed, defined benefit plans do work if they are well-managed. Eighty-nine percent of state and local employees in the United States are covered by these plans. Eliminating pensions for public employees would put our state and local governments and school districts at a severe competitive disadvantage when it comes to recruiting the best school teachers, social workers, economic development experts and technology workers.
Many states maintain well-funded pension plans. Pension systems for public employees in the Netherlands and in numerous places in Canada maintain assets of at least 100 percent of unfunded liabilities. If we have the political will, so can we.
The New Brunswick, Canada, plan, one of the best systems in North America, is an excellent model. To ensure its health, it was required to make painful cuts to employees, such as longer working careers and adjustment in the method of calculating pension benefits, but all parties accepted them as necessary. Rather than put all the risk of a down market on employees, it contains the critical element of a real sharing the risk between employers and employees so that when the market went through a rough patch, the pension fund assets were adjusted, contribution levels were increased, and ultimately, if necessary the pension benefits were temporarily cut. When the economy recovered, the benefits were restored and recouped.
We hope the legislature recognizes there is a better solution out there and that maintaining a pension system is vital to our state’s economic health that we maintain a pension system. The legislature, in cooperation with the governor, could appoint a truly non-partisan task force to create a new plan we call Kentucky Shares, which could be enacted by the legislature. The task force must include representatives of local governments, as well as employee and retiree groups.
Employees and retirees of TRS and CERS would have to buy into changes in their existing pension plans and be able to vote to dissolve the old plan and join the new plan as part of pre-packaged local bankruptcy filings. Those in other pension plans could transition voluntarily to Kentucky Shares.
Admittedly, there is nothing easy about this. But maintaining an affordable, modest and stable pension system is vital to our future. If we do this right, thousands and thousands of Kentuckians will have an income to live out their lives in security and dignity. If not, we help perpetuate our state’s place on the lowest rungs of economic opportunity.
Frederic J. Cowan is a former state legislator, Kentucky Attorney General, and circuit judge. W. Gordon Hamlin, Jr. is a retired attorney and President of Pro Bono Public Pensions.