Unfortunately, Kentucky and its public pensions have been in the news a lot lately. I say unfortunately because Kentucky’s pensions do suffer from a real underfunding problem and the state just elected a new governor who campaigned on gutting those pensions and moving to a 401(k)-style system. As we know, this will make the problem worse, not better.
As if that weren’t bad enough, the Lexington Herald-Leader reported last week that the pension fund for state legislators is well-funded and cloaked in secrecy, while the pension funds for teachers and other public employees suffers from neglect. This brazen hypocrisy gets to the heart of many pension problems around the country: if you properly fund your pension, it will do well. This is not just a theoretical, academic exercise either. There are real world examples of pension funds that have thrived because they are well-funded.
The Illinois Municipal Retirement Fund serves as a great example of a well-funded pension plan. For many anti-pension ideologues, Illinois is the posterchild of troubled public pensions. However, the IMRF is a counterargument to this narrative. Illinois state law requires that towns and cities make their annual payments to the IMRF. Unlike the irresponsible politicians in Springfield, municipal leaders cannot shirk their responsibilities. They are legally obligated to make their pension payments, so they do and the pension fund has done well, even during the Great Recession.
Furthermore, the National Association of State Retirement Administrators found that from 2001-2013, most state governments and other pension plan sponsors responsibly made their annually required pension contributions. Their study found that pension plans with good governance requirements- that is, requirements to make their payments- almost always received higher contributions during that period. In fact, for the period studied, NASRA found that most states paid 95 percent or more of their required payment each year. The few states that conspicuously failed to fund their pensions dragged down the average funding ratio for all public pension plans.
The lesson here is simple: if a state appropriately funds its pension every year, its pension will do well and firefighters, teachers, librarians, and other public employees will have a modest, but secure retirement. When John Arnold and Chris Christie and other anti-pension zealots tell you that pensions are unsustainable and unaffordable, remember that the 401(k)-style system for which they advocate has been a failure for working families. The way to achieve full funding for pension systems is responsibility and good governance, not gutting retirement security for public employees and their families.