A recent op-ed by the National Public Pension Coalition called Matt Bevin's plan to switch future state employees from the defined-benefit pension plans to defined contribution 401(k) style accounts "misguided,"
However, the only thing that is misguided is the analysis put forth by the coalition.
To be fair, there were a few accurate statements included. For example, the author correctly noted that Standard & Poor's recently lowered Kentucky's credit rating due to the poor state of its public pension system.
It also correctly noted that the pension issue is a real problem requiring real solutions. However, it failed to note that Bevin's opponent, Jack Conway, wants to keep things business as usual, offering no plan to address the pension crisis.
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Most other claims, however, were misleading.
First, it says that the move to 401(k) style plans would "rob thousands of Kentuckians of their hard-earned retirement security." However, Bevin's plan only calls for moving future public employees, not existing ones, to a 401(k) plan. In fact, Bevin's plan is to ensure current employees and retirees are given the benefits they have earned and been promised.
The author also stated that the switch has "huge up-front cost" because "with fewer new workers entering a group retirement system [...] there are fewer people in the plan to cover the costs of those who retire."
This is not accurate because our state pension plans are not pay-as-you-go systems (like Social Security), where current employee contributions are used to fund current retirees' benefits. Instead, the Kentucky Retirement Systems are (supposed to be) funded pension systems, whereby the contributions from current workers are used to accumulate assets, which are then used to pay their benefits in the future.
The current unfunded liability is the same no matter what system we are in — and it is up to the state to find a way to fund that gap. If contributions for current employees are used to fund pension benefits of current retirees, it is simply pushing the unfunded liability down the road, robbing Peter to pay Paul, and exacerbating the problem for those current employees.
NPPC cited some statistics from other states to support its position. Indeed, the stats are persuasive in the vacuum in which they are presented — so here is some context.
The author noted that Michigan, in the 15 years after making the switch to 401(k), went from being 109 percent funded to 60 percent funded — a 45 percent decrease to the funded amount.
But in just half that time, the 7.5 years of Gov. Steve Beshear's administration, staying in a defined benefit pension system, the system went from 56 percent funded in 2007 to 21 percent funded in 2014 — a 62 percent decrease.
Alaska was another interesting choice for comparison given that it was recently ranked No. 1 in the George Mason University Mercatus Center rankings for having best state fiscal condition.
On the bottom end of that list for states with the worst fiscal conditions were Kentucky at 45, Connecticut at 47 and Illinois at 50. Coincidentally, those three states have the three worst-funded pensions systems in the country and have not made a switch to defined contribution.
The author also made the assertion that 401(k)-style plans "siphon money away from workers and into the pockets of Wall Street bankers." Well, they must have missed the recent report that shows that the Kentucky pension management fees were much higher than previously reported.
Remember, it is Bevin who has been calling for an outside audit of the state pension system and opening the books to the public — not Conway.
Bevin's plan to transition to 401(k) is not meant as a quick fix to the current unfunded liabilities — it's intended to stop the bleeding, so that 15, 20, 30 years into the future we are not dealing with the same issue.
Bevin is willing to make tough, yet necessary decisions, even if they will not make him popular in his next election cycle.
And if current public employees want to see long-term viability for their retirement, they should look past the misleading rhetoric offered by a public-pension advocacy group. They should look to Bevin's pension expertise and experience to put Kentucky's pension on the path to solvency.