Pension Legislation Should Solve Real Problems and Avoid Harmful Consequences
October 6, 2017
Legislative leaders say they will soon share a framework for potential pension legislation the General Assembly will consider in a special session this fall. Big questions loom over the legislation, including the following:
- Will it actually reduce the existing unfunded liability Kentucky must pay down over time —the main pension challenge the state faces?
- While legislators now say they will protect past cost of living adjustments for those already retired, will the bill also avoid breaking promises to current employees?
- Will it raise costs in the near term through dramatic actuarial assumption changes — and what revenues will the General Assembly use to pay those expenses?
- Will it lower the retirement security of future workers and create new challenges attracting and retaining a skilled public sector workforce?
- Will it add costs in the future by closing the existing pension plans and shifting to more expensive designs?
What the General Assembly includes in final legislation has big consequences for many thousands of Kentuckians as well as our budget and economy. It is important that the plan take into account all of the facts.
Here is a wrap-up of recent KCEP research on the issue:
PFM Report Uses Exaggerated Claims to Justify Harsh, Counterproductive Cuts
The state’s pension consultant PFM recommended a set of harsh and counterproductive benefit cuts for retirees, current workers and future employees.
Switch to 401k-Type Plan for Kentucky Public Employees Will Cause More Harm
Research from experts and other states shows a move to 401k-type defined contribution (DC) plans often does not save money compared to the existing pension plans, introduces new transition costs and reduces retirement security for public employees.
Pensions Need Responsible Funding Plan, Not Exaggerated Claims
The PFM report overgeneralizes about the need to make large changes to actuarial assumptions, setting the table for drastic cuts in benefits. Instead, Kentucky needs a measured, responsible approach to paying down its pension liabilities over time.
Proposed 401ks Cost More Than Kentucky’s Existing Pension Plans
The DC plans proposed by PFM would cost more than Kentucky’s existing defined benefit (DB) plans, according to data from PFM and the retirement systems, even while delivering smaller benefits for workers.
Decline of Private Sector Defined Benefit Plans No Model for Public Plans
Calls to end Kentucky’s DB public pension plans often refer to the move away from DB plans in the private sector, but that decline is the result of factors that do not affect public sector plans.
Kentucky Will Face Transition Costs If It Shifts to 401ks
Proponents are claiming Kentucky will face no transition costs from moving employees into DC plans, but that assertion ignores the main reason there are transition costs: a closed plan must invest with a shorter time horizon due to an aging population, which will lower returns.
Level Dollar Approach Shifts Enormous Burden to Upcoming Budget
The proposed level dollar approach to funding Kentucky’s pension liabilities would shift a large burden to Kentucky’s upcoming state budget while asking comparatively little from budgets a couple of decades from now.