The pension bill stumbled in the Kentucky Senate last week and was sent back to committee. It’s the latest in a nearly year-long series of missteps. The attack on pensions is failing mostly because teachers and other public employees are fighting back. It’s also been hampered by facts that contradict proponents’ claims about what’s needed and why.
Backers say their ideas are about saving money and protecting benefits already earned. But their proposals are not a cost saver, and their crisis claims are deeply exaggerated.
For most of the last year, proponents argued that we must end defined benefit pensions in favor of 401k-style defined contribution plans. My organization put out a report in August 2017 showing it would cost more money to make that switch even while workers would receive lesser benefits. Input on this issue by us and others was dismissed until February, when legislative leaders finally admitted it was true.
Despite that mistake, legislative leaders continue pushing ideas they inaccurately claim will save money and are needed to rescue the plans. Now the focus is on the $3.2 billion in cost reductions over 20 years the actuary projects in the Teachers’ Retirement System due to Senate Bill 1.
Actuaries don’t opine on legality, and most of that comes from cutting already-earned benefits protected by the inviolable contract — primarily teachers’ cost of living adjustments. Also, the hybrid cash balance plan proposed for new teachers in Senate Bill 1 is no cheaper than the modest current defined benefit plan, even while providing less retirement security. The bill “saves” money by shifting some of the cost to local school districts, the poorer of which simply cannot afford it. The bill also cuts long-term costs by unnecessarily front-loading the payment schedule on unfunded liabilities, causing even more harmful budget cuts to schools and other public services in just two years.
What’s more, there are other very real costs from Senate Bill 1 that are not measured by an actuarial analysis. Lower retirement benefits will make it harder to attract and keep qualified public servants, harming services and thereby weakening our economy over time. A reduction in benefits will come back in lower tax revenue due to less local spending from pension checks — which last year injected $3.4 billion into the Kentucky economy.
Then there’s what the actuarial analysis to Senate Bill 1 says about its impact on Kentucky Retirement Systems. It estimates the bill would add $5 billion in costs for that system over the next 35 years. This cost comes from a provision that extends the time period to pay off the unfunded liability by six years. Just like if you asked your bank for six more years to pay off your mortgage, that change will increase costs over the long term.
Its inclusion in the bill exposes as empty the constant rhetoric over the last year that we must no longer “kick the can down the road” — which is exactly what that proposal does — and that we are in a “crisis” where pensions will run out of money in a few years unless we cut them. Those claims were fabricated to build support for ending pensions.
While our pension plans are underfunded, our liabilities are not owed immediately. We have time to steadily nurse the plans back to better health with targeted and consistent funding — as the six-year extension admits. We don’t have make panicked benefit cuts. And we don’t have to rush paying off liabilities that are owed far into the future and never all at once.
It’s time to put an end to Senate Bill 1. Lawmakers should start over with a process that involves those who receive public pensions, rather than shutting them out. And they should gather all of the facts about the issue — including those that disprove ideas they believe to be true.
This column ran in The Lane Report on Mar. 13, 2018.