FRANKFORT, Ky. — As state lawmakers continue to grapple with funding teacher pensions, some say lessons from neighboring West Virginia can offer insight into whether or not Kentucky should switch to a defined-contribution retirement plan for teachers or uphold its public pension system.
David Haney, executive director of the West Virginia Education Association, says in the early 1990s, the West Virginia Teachers Retirement System closed after decades of underfunding by the state. He says, when the state moved to offer teachers 401(k) plans, they were fraught with problems, including lack of diversification in stock options.
“The biggest problem was the state here in West Virginia offered no education for the participants in the plan,” he relates. “Education employees are not investment experts, and so consequently, many of the participants really suffered in terms of their ability to grow their investment.”
Haney says decades later, the 401(k) plan also left thousands of teachers grossly unprepared for retirement.
There are currently more than 40,000 public school teachers in the Commonwealth.
Larry Totten, president of Kentucky Public Retirees, says the state will have to grapple with a senior population down the road that might not have enough income to survive on.
“As a retiree, if you don’t have the income to sustain yourself, you’re going to have to rely on family, public assistance, something to stay alive,” he states.
Haney points out that in 2005, 83% of West Virginia teachers aged 60 and older had an average savings of just $23,000 in their 401(k). He adds, he knew the state would have to make some major changes.
“And that’s why we pushed very hard to go back to the defined benefit system,” he explains. “And so, in 2008, now senator, then Gov. Joe Manchin worked with us and the Legislature to reopen the defined benefit plan.”
Haney says when given the option to move back to a pension, nearly 80% of West Virginia teachers made the switch.
PHOENIX, Ariz. – Healthy pension plans for public workers help the Arizona economy, not just the retirees who get the checks, according to the latest research.
Backers of Arizona’s public pension system say their defined-benefit retirement plans are doing well, although critics have claimed that some plans may be under-funded. The National Institute on Retirement Security says the benefits from these pension plans – including teachers’ – generated more than $7 billion in economic activity in Arizona in 2016, the most recent figures available.
Julie Horwin, president of the Arizona Education Association-Retired, agrees they’re helping to keep the economy strong.
“Pensions are not just an entitlement given to people who are older,” says Horwin. “They’re actually one of the chief economic engines that drives Arizona. Without those pensions, our economy would suffer a great deal.”
One example of criticism was a recent op-ed by the research group Arizona Chamber Foundation. It warned that local and state governments are regularly having to increase their pension-plan contributions, suggesting this could eventually lead to solvency problems.
The National Institute on Retirement Security research breaks down the numbers further, showing that each dollar invested by Arizona taxpayers in public pensions supports more than $6 in economic activity.
Institute Executive Director Dan Doonan says defined-benefit pensions also have advantages for retirees over other forms of savings.
“What we’ll see more with the 401(k), as retirees retire, it’s not really clear how much you can pull out each year,” says Doonan. “So, you spend your working years saving – and then you retire, and you’re sort of afraid to use the money you save for retirement, because you don’t know what’s coming.”
Doonan adds it is difficult for many workers to save enough for retirement, making a pension even more critical.
“We looked at the median savings of workers and it’s basically zero dollars,” says Doonan. “And even amongst those nearing retirement, it’s about $88,000. That’s a lot of money – but if you think in terms of a few decades in retirement, it’s not a lot of income per year.”
Despite claims that public pensions are draining state and local coffers, he adds only about one-quarter of contributions to Arizona pensions are from employers. The rest are from employees and the successful investment of pension funds.
Although state retirement systems have made a strong recovery from the Great Recession to reduce once-yawning funding gaps, years of tax cuts could come back to haunt states and force them to reduce retirement benefits. That’s according to a report from the National Conference on Public Employee Retirement Systems (NCPERS).
NCPERS is urging state governments to close tax loopholes and end “irresponsible corporate subsidies” before another recession strikes to avoid cutting state services and public employees’ retirement benefits.
“With the US economy now 10 years into an economic expansion, it’s not a question of if, but when, we will face another recession,” Hank Kim, executive director and counsel of NCPERS, said in a statement. “State governments have an immediate opening to improve their revenue structures and need to act decisively.”
The report said Americans’ personal income, adjusted for inflation, rose 24% from the end of the Great Recession in mid-2009 to the last quarter of 2018. Real tax revenues collected by the states, however, were only 13.4% above where they were during the third quarter of 2008, their pre-recession peak.
“Meeting future pension plan obligations and commitments to other public services will be much easier if states have an adequate and growing tax revenue structure,” said the report.
Part of the declining share of state tax revenues as a share of income is attributed to legislated tax changes, said the report. According to the National Council of State Legislatures (NCSL) states cut taxes each year from 1995 to 2000, a period of strong economic growth with the GDP growth averaging 4.3%.
But the US was hit by a recession in 2001, which was followed by six years in which the GDP growth averaged just 2.7%. From 2001 to 2009, states enacted tax increases, mostly through sales taxes. In 2010, the first year of recovery, there were large increases in numerous taxes and fees, and since then, legislated tax changes have been small, and the enacted changes tended to be sales tax increases.
NCPERS expects another recession could hit the economy at some point over the next decade.
“When that happens, the states’ ability to meet their financial commitments, such as public pensions, will depend on those states having sufficient revenues to fulfill these commitments,” said the report. “When tax revenues tighten, as they do in recessions, the competition for general fund dollars will become even more intense, and public pensions will face greater challenges in obtaining the funding to meet any budgetary gaps.”
The report outlined several principles for making state tax systems stronger, more resilient, and fairer for both current and future taxpayers:
- Avoid tax cuts and other legislative actions that reduce tax revenues.
- Tax cuts and tax incentives aimed at attracting businesses and jobs rarely work as advertised.
- Reverse previous tax cuts. Major tax increases are never easy, but the easiest tax to raise is probably one that was recently cut.
- Increase reliance on personal income tax. Personal income tax has the capability to grow at least as fast as the growth in the income of state residents.
- Minimize dependence on sales and other consumption taxes. Sales taxes are regressive, meaning they fall harder on low-income taxpayers, and the revenues tend to diminish over time.
- Be wary of exotic revenue sources such as lotteries and gambling, casinos, which tend to displace existing revenues.
- Require all tax breaks to expire after some set period.
Service is a special word. Americans grant the word to our servicemen and women around the globe protecting our country, and to police officers, firefighters and educators in our communities.
Dedicating one’s life to service requires a special type of person: someone who is willing to put money aside to risk danger, to educate, to protect and to better our society.
As a 92-year-old World War II veteran, a retired firefighter, two-time Kansas Fire Marshal and chief of the Topeka Fire Department, I have something to say, and I’ve earned the right to be listened to: It has been 22 years since retired public employees in Kansas have received a cost-of-living adjustment (COLA), and enough is enough.
As a farm boy from Kansas, it was my duty to defend my country after we were attacked. In 1944, I went to the enlistment office and signed up for the Navy. Based in Guam, I operated heavy machinery and served on troop transport ships throughout the Pacific. When I was honorably discharged in 1946, I came home to Kansas.
From 1954 to 1978, I served as a firefighter for the city of Topeka. After years of sirens blaring in my ears as I raced to protect my community, my hearing is almost gone. For the rest of my career, I had the pleasure of serving my state as the chief of the Topeka Fire Department and State Fire Marshal.
When I retired in 1979, I was granted a pension — a monthly benefit that I earned over 24 years of service to the city of Topeka. At the time, my benefit was modest. From 1979–1997, after several COLAs to keep up with the cost of inflation, my pension benefit was adjusted to $1,640 per month. With the exception of a one-time bonus payment of $300 in 2008 and 2009, I have not received a COLA since 1997 (22 years). Every single year since 1997, the cost of my health care, daily living expenses and groceries have gone up, but my pension benefit has stayed the same.
In 2019, almost half of my monthly pension benefit went to health care costs. It has become more and more difficult just to get by.
Thousands of retired public employees across the state of Kansas share the same story as mine. In fact, 88 percent of retirees in Kansas have never actually received a COLA since they retired. Retirees just like me are struggling right now in the various communities we protected and served.
Forced to rely on family members and in some cases, social services, the same folks who served our communities so diligently are having to turn to them again, but this time for help: for food, shelter and clothing.
In Kansas, we’re better than that.
If you’re reading this and you’re outraged, there is something you can do. On Monday, Jan. 13, the Kansas Legislature began its legislative session. Visit www.openstates.org/find_your_legislator to find your state lawmakers – both from the House of Representatives and the Senate.
When you do, give them a call or send them an email and tell them to support retired public employees — they served our communities and now they need a COLA.
Ed Redmon is a retired Topeka firefighter and WWII veteran. He says he hasn’t received a cost-of-living adjustment to his pension benefit in 22 years.
Of all the issues likely to come up during the 2020 budget session, a solution for retirees on the state’s pension system — who have not seen a cost-of-living increase to their benefits in more than a decade — is sure to attract ample attention from state lawmakers.
Since cost-of-living adjustments for Wyoming’s pensioners were eliminated in the wake of the Great Recession, retired state employees have seen slight pay increases while weathering increases in their state health insurance premiums. And those premiums could increase further as the Joint Appropriations Committee weighs raising them in order to keep up with costs that have consistently outpaced inflation rates in recent years.
“There are legislators looking seriously at changing deductibles and changing benefits,” Gov. Mark Gordon told Wyoming AARP members in a telephone town hall meeting Tuesday night. “It was a little bit of a surprise to see that we had the challenge we did. We really tried to mitigate what the raise was going to be and do it over several years so it wasn’t such a big shock. It is still a shock. I don’t think we are unique in that respect.”
For the state’s retirees, however, those costs can add up. Paired with an average inflation rate of 1.5 percent annually over the past 12 years, the retirees have seen the buying power of their pensions diminish substantially, their fixed incomes eaten up by everything from rising medical expenses to higher grocery bills.
“These retirees have not had any pay increase, on top of their health insurance going up,” Betty Jo Beardsley, executive director of the Wyoming Public Employees Association, said Wednesday. “That means they have less funds to spend in their communities.”
It’s a subject that the Wyoming Healthy Retirement Coalition — which the association is a member of — is prepared to take on in earnest during the 2020 session next month.
On Monday, the organization — which formed nearly a decade ago after efforts to privatize the state’s retirement system — will be holding a town hall in Cheyenne to promote the re-introduction of a failed bill from 2019 sponsored by House Speaker Steve Harshman, R-Casper. If passed, that legislation would have offered the state’s retirees a lump sum increase to their pensions in an effort to offset some of these built-in costs.
It’s a proposal that proponents believe could gain some traction with legislators in the House — who narrowly defeated the measure last year — while having little impact on the state budget. According to a Legislative Service Office fiscal note on last year’s version of the legislation, a cost-of-living increase to the state’s existing pension would cost the state $5.5 million annually.
In a state where roughly one quarter of the workforce is public employees, according to the Bureau of Labor Statistics, any increase is bound to be popular and far-reaching. Facing down bleak budgetary prospects and a Legislature more favorable to cuts than increases under those conditions, however, an increase in expenditures to the state pension system becomes a big ask.
With a number of unknowns — like the proposal’s long-term implications for the state’s finances — it becomes an even more difficult concept. Though the average retirement age has increased in recent years, people are living longer as well. The state counts 7.6 percent of its male retirees and 9.6 percent of its female retirees as over the age of 85, according to a 2018 report
from the Wyoming Retirement System Board, making predictions for a cost-of-living adjustment even hairier down the line.
Regardless of the unknowns, Gordon seemed receptive — albeit cautious — about the idea Tuesday night.
“One of the biggest bugaboos has been that when (states) implement cost-of-living increases on a regular or automatic basis, they run them into very difficult circumstances,” Gordon said. “Wyoming is not one of those states. We probably need to look at a cost-of-living adjustment for retirement, but it is something that that board needs to look at for its financial solvency and its obligations to retirees going forward.”
Special interest groups like the AARP, however, feel that ask is a worthy one.
“A (cost-of-living adjustment) is certainly a concept we support,” Tom Lacock, the associate state director for communications and state advocacy at AARP Wyoming, wrote in an email. “It has been 12 years now since there has been a (cost-of-living adjustment), and while we understand the condition of the state’s finances, inflation and rising costs of health insurance for state retirees mean the pension funds our retirees worked so hard to earn in their working life just don’t go as far as they used to.”
“During our teletown hall (Tuesday night) we heard from a man who saw the health insurance costs through the state go up $3,000 this year for he and his wife, who both retired after careers with the state,” he added. “That is real impact on those who can least afford it.”
There are millions of state and local public employees across the U.S who are not covered by Social Security, and are banking instead on government pensions as a main source of retirement income.
Researchers with the Urban Institute recently highlighted how these workers could face unique vulnerabilities with their financial security in retirement, especially as some states and localities seek to rein in spending on pensions by making benefits less generous.
An analysis the researchers conducted found that employees who are not in the Social Security system and who were hired in 2018 generally saw rules governing their pension plans that were more stringent than those for workers hired in 2008. The result is that the more recently hired employees will see lower retirement benefits.
For example, the amount these “noncovered” employees have to contribute to their plans and the time required to “vest” for their benefits both increased by about 8%, based on the analysis.
Changes like this for the noncovered employees were slightly smaller than the changes seen for public employees overall, according to the report. The researchers say that the reasons for the difference between the two groups are not fully understood.
Debates about the merits of expanding Social Security to cover all newly hired state and local public employees have simmered on and off for years now, with different groups at odds over whether the policy change would be a plus overall for retirees and their families.
When Social Security was created in the 1930s, state and local government employees were excluded from the program. Subsequent changes between the 1950s and early 1990s led to a situation where the program does now cover the majority of state and local workers.
But in 2018, about one-quarter of all state and local government employees, or around 5 million people, were working in positions that were not covered by Social Security, according to the Center for Retirement Research at Boston College.
Among these employees are state agency workers, firefighters, police officers and teachers.
The share of workers not participating in Social Security varies widely from state to state. Estimates cited in a 2011 Congressional Research Service report indicate that, at that time, nearly half of the noncovered employees resided in three states: California, Texas and Ohio.
Under federal law, state and local employees who are not covered by Social Security need to be enrolled in an employer-sponsored pension plan that provides at least equal benefits.
But the Center for Retirement Research, in a 2018 report, raised doubts about whether plans are meeting this standard after accounting for factors like long “vesting periods,” which determine when a person is eligible for benefits, as well as limited cost-of-living adjustments.
Another issue that the Urban Institute researchers bring up is that some employees do not work in government jobs without Social Security for their entire careers.
They point to findings that suggest that with about half of “defined benefit” state and local pension plans, workers have to spend at least 20 years on the job before the value of their pension benefits exceeds the value of their contributions into the system.
“Unlike other state and local government workers who are also covered by Social Security, noncovered workers may face greater risks to their retirement security if they change jobs and spend less than 20 years in the same pension plan,” the Urban Institute researchers note.
“They may also lack valuable protections the Social Security program provides,” they add.
The lack of “portability” with pensions when people switch jobs is an issue that’s come up in prior discussions about whether all public employees should be covered by Social Security.
Supporters of that option have also pointed out that Social Security, compared to pension programs, could also provide steadier cost-of-living adjustments.
But the 2011 CRS report notes that the net effect on retirement benefits under mandatory Social Security, versus the status quo, is hard to know entirely because it would depend to some extent on how state and local governments respond with changes to their pension policies.
Meanwhile, the International Association of Fire Fighters, a labor union, opposes mandatory Social Security, arguing it would jeopardize specialized retirement systems for firefighters, which tend to include earlier retirement ages than other plans.
Social Security itself has financial problems. Reserves in the Old-Age and Survivors Insurance trust fund—the main pot of money to pay benefits to retirees—will be depleted around 2034, according to federal projections from last year.
After that time, the estimates indicate that ongoing Social Security revenues would be adequate to cover about 77% of expected benefits paid out of the account.
Earlier estimates have shown that requiring all state and local government employees to enroll in Social Security would provide a mild boost to the financial health of the program.
More about the Urban Institute analysis can be found here.