Those who do not learn from history are doomed to repeat it – and it’s prime time for Kentucky lawmakers to learn a history lesson.
Kentucky’s public pension funds face very real challenges, caused by decades of underfunding on behalf of the state. While public employees contributed with every paycheck, the state continuously kicked the can down the road. Now, rather than address the state’s pension problems with sound economic policy, political interests seek to close Kentucky’s pension systems and place newly hired employees in a 401(k)-style defined contribution plan.
A report released today by consulting firm PFM recommends the switch away from pensions, while also suggesting several other radical changes including increasing the retirement age for public employees. The report relies upon junk math that has been discredited in other states in the past, in order to push Governor Bevin’s political agenda. PFM promotes a failed model, recommending measures that will damage both the fiscal health of the state and the recruitment and retention of public servants.
We’ve said it before and we’ll say it again: closing a pension system is never a good idea. One need look no further than the states and cities that have closed their pension systems to learn of the costly ramifications that follow.
In 1997, the Michigan State Employees’ Retirement System (MSERS) pension plan was closed and new hires were placed in a 401(k)-style plan. At the time of the plan’s closure, the funded status was 109%. With no new employees paying into the pension fund and an aging demographic, plan costs soared and the funding level dropped; by 2012, the plan was severely underfunded at 60.3%. After 20 years under the 401(k) plan, the state’s Office of Retirement Services found that the median balance in these accounts is just $37,260.
While Michigan continues to suffer the consequences of the MSERS closure, other states and municipalities have realized the error of their ways and taken steps to reinstate closed plans.
In 2005, West Virginia reopened its pension system for teachers after closing the plan in an attempt to improve funding levels in the early nineties. In less than a decade after the plan’s reopening, funding levels more than doubled and teachers now enjoy access to a secure, dignified retirement.
After the Great Recession decimated 401(k) accounts across the country, state employees in Connecticut banded together and campaigned for the right to join the closed state pension system. They were successful, and in 2012, transfers out of the faltering 401(k) plan and into the pension began. Estimates place the total cost savings for the State of Connecticut as a result of these transfers at $10 million per year.
State employees weren’t the only ones in Connecticut to recognize the value of a pension: firefighters in the city of New London moved back to a pension in 2014 after the previous defined contribution plan failed to provide adequate financial security for retirees.
Aside from providing employees with the most secure retirement, pensions also serve as a valuable tool to recruit and retain talented workers. In 2012, the city of Palm Beach, Florida moved from a traditional pension to a hybrid defined benefit-defined contribution plan. The city lost 24 public safety officers to neighboring jurisdictions and another 28 left the following year. Without competitive retirement benefits to offer, Palm Beach’s police and fire departments were inexperienced and understaffed. In 2016, the city council voted to return to a traditional defined benefit pension.
PFM’s recommendation to close Kentucky’s pension systems and shift workers into a 401(k) is faulty and politically driven. Their report seeks to promote Governor Bevin’s political agenda, rather than to offer constructive solutions for Kentucky’s pension systems. Their 401(k) “solution” has been tried before and, as history shows, it’s the wrong choice for all parties involved.