KY Policy Blog

Pension Issue is Primarily a Revenue Challenge

By Jason Bailey
September 20, 2012

Over the last several years, much of the focus given to Kentucky’s pension system has been on ways to shift new employees into some version of a 401k-style retirement plan. But as a presentation to the state’s pension task force this week showed, that idea has little to nothing to do with the state’s main challenge on this issue: how to pay back the existing unfunded liability.

Consultants from the Pew and Arnold foundations presented preliminary information to the task force on the impact of various options for dealing with the liability. All of the options that cut pension benefits for employees barely made a dent in the problem.

That’s because the unfunded liability is for benefits already earned by existing employees and retirees—benefits that are both legally and morally obligated to them. Cutting benefits moving forward won’t make that debt any smaller.

Also, as Pew’s David Draine noted, the employer costs for new employees under the current pension plan are already modest, especially after cuts and shifts in costs to employees were made in 2008. Draine said that “seeking meaningful savings from a new plan is not possible.”

That is demonstrated in a chart in the presentation showing that the state costs for new employees would be basically the same under the existing system as under three types of 401k-style defined contribution plans.

The only options Pew and Arnold presented that truly address the liability involve the state making bigger contributions to the system. The consultants noted that the option of eliminating the income tax exclusion on all retirement income—which the governor’s blue ribbon tax reform commission is currently considering—and dedicating that revenue to the pension system until it is fully funded would reduce the liability by $7.5 billion.

Pew and Arnold noted that “the funding gap facing Kentucky is so large that even with an implausibly aggressive attempt to curtail benefits, costs would remain substantial.” They stated that “ultimately, more money will need to be put into the system to pay for the Commonwealth’s pension problems.”

Many in Frankfort have wanted to dodge the fact that the pension issue is in fact primarily a revenue challenge. For most of the last twenty years, the state essentially borrowed from workers’ retirements to avoid making needed tax reforms and to limit some of the impact of a failing tax system on the state budget. The state is still not making its full required contribution to the pension system, which means we’ll be paying much more in future years unless we come up with more revenue.

Some task force members are recognizing this reality. In Tuesday’s meeting, Representative Brent Yonts talked about the need to merge the recommendations of the task force with ideas to raise new revenue coming out of the governor’s tax reform commission.

Let’s hope that this week’s meeting is the first step toward focusing this issue on the real problem at hand. Video of the meeting is available here.

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