Today the Kentucky Center for Economic Policy (KCEP) and the Keystone Research Center (KRC) released a new report on public pensions in Kentucky. The report, titled “Switch to 401k-Type Plan for Kentucky Public Employees Will Cause More Harm,” finds that changes to the public pension systems proposed by Gov. Matt Bevin would harm current public employees and retirees in the Bluegrass State. Moreover, the true cause of Kentucky’s pension problems is the state government’s repeated failure to pay what it owes to the pension funds.
As has been well documented, Kentucky has some of the most poorly funded public pension plans in the nation. In particular, the Kentucky Employees Retirement System, Non-Hazardous plan is only funded at 17 percent. In light of these challenges, Gov. Bevin has said he will call a special legislative session this autumn to address the future of the state’s public pensions. Based on his past statements, it is likely the governor will propose closing the pension plans and forcing future hires into risky and unreliable 401(k)-style defined contribution plans. This would be the wrong move for Kentucky and fails to address the true source of the state’s pension woes.
The new report from KCEP & KRC explains that switching to a 401(k)-style plan would actually increase costs for the state. This is due to the inefficiencies of 401(k)-style plans. It costs nearly twice as much to provide the same level of benefit in retirement through a 401(k)-style plan than it does through a defined benefit plan and the current costs to the state of the defined benefit plan are low. Public employees in Kentucky contribute more to their pension than the state does. Additionally, switching to a defined contribution plan would make it more difficult for the state to pay off the unfunded liability in the pension systems, which would increase costs for Kentucky taxpayers.
Beyond increasing costs for taxpayers and weakening retirement security for public employees, moving to a 401(k)-style defined contribution system would also harm local economies throughout the commonwealth. Public pensions generate $3.4 billion in economic activity each year in Kentucky. Switching to a defined contribution plan would cause Kentucky to lose out on this economic benefit. Money contributed to the defined contribution plans would be lost to out-of-state money managers, who charge higher fees to 401(k) participants. This is money that would be enriching Wall Street rather than local communities across Kentucky.
This new report makes a significant contribution to the current debate over the future of public pensions in Kentucky. As the governor continues to talk about abandoning pensions and forcing future public employees into unreliable 401(k)-style plans, the report points out that this move will fail to address the state’s pension challenges. Instead, it will decimate the retirement security of current and future public employees.