The Richmond Register

March 6, 2013

Pension reform bill focuses on wrong issues

By Jason Bailey

BEREA — To hear some in Frankfort these days, Kentucky needs pension reform now, now, now to avoid our own fiscal cliff, sequester, Greek economic meltdown or you name the financial calamity.

But in reality the urgency and rhetoric of so-called pension reform are a distraction from the causes of the pension funding problem and its solutions.

The real story goes like this.

Over the past couple of decades, the state has refused to fix its antiquated tax system. One way it dealt with inadequate revenues was to short-change contributions to employees’ retirement. The legislature hasn’t made the full required payment to its pension funds for 14 of the last 21 years. It also didn’t pay for cost-of-living adjustments and benefit changes when they were made.

Those factors created a big funding gap in the pension system. When the banks wrecked the economy in 2008 (only a few years after the dot-com bubble burst), the resulting investment losses worsened the problem.

But instead of talking about how to fix Kentucky’s revenue stream and assure responsible payment of the state’s obligations, the focus has been on moving new workers to a less-secure retirement plan like a 401k or hybrid cash-balance plan.

Yet, such plans do nothing to reduce the pension system’s unfunded liability. In fact, the proposed cash-balance plan is projected to cost the state more than the current plan over the next 20 years. It will also increase employee turnover, leading to more money spent on hiring and training, while reducing retirement security for career employees.

The existing defined-benefit pension plan for new workers is in fact quite cheap, costing about four percent of what is spent on salaries for typical workers. Its risk is low, if contributions are made on time and any cost-of-living adjustments are funded.

Instead of a financial plan to address the debt, the liability is being used as an excuse to achieve an ideological goal. The same people who want to privatize Social Security nationally want to move toward 401k type plans for public employees. And along the way are not-so-subtle hints about supposedly-overpaid public employees.

Yet while overall benefits are better in government than in the private sector, wages are far worse – such that public-sector workers in Kentucky receive about 9 percent less in overall compensation than private sector workers with comparable education and experience. The public workforce also hasn’t been receiving raises in recent years.

And pitting workers against each other is a distraction from the real problem that all workers now face in maintaining middle-class economic security.

In the private sector, workers have seen secure pensions replaced by inferior 401k plans or nothing at all. Median wages have been stagnant for the past decade. The result is a growing number of Kentuckians who are unprepared for retirement, and anxious about it.

All this suggests two important issues that should be the focus.

The first is finding the resources to responsibly address past failures to properly fund public workers’ retirement. That conversation is about revenue, not pensions. It involves looking at ways to sustainably and fairly generate the money needed to pay the obligation to workers while making other crucial public investments.

And the second conversation is about what we can do to support more secure retirements for all Kentuckians – including those in the private and the public sectors. Some states are beginning to look at ways to let small businesses participate in some version of state pension plans to access professional investment management, low administrative costs and risk pooling. Protecting and even strengthening Social Security – rather than cutting it – must be part of the answer. So should protecting traditional defined-benefit pension plans.

Reductions in retirement benefits are just one example of how we are slowly chipping away at the policies and institutions that built a middle class in this country. We in Kentucky shouldn’t let ourselves get distracted from the real issues impacting our economic future, including our retirement security.

Jason Bailey is director of the Berea-based Kentucky Center for Economic Policy,