Yet another warning about the worrisome future of public pension programs came out this week and Kentucky is again among the biggest troublespots.
The Associated Press reported the Pew Center on the States, in its study of “The Widening Gap,” identified the commonwealth as one of four states, along with Connecticut, Illinois and Rhode Island, with less than 55 percent of the money they need on hand to meet future obligations to retirees.
Kentucky owes $37 billion to present and future pensioners and has just 54 percent of that total on hand. Kentucky Retirement Systems has an unfunded liability of more than $19 billion. It pays out more than it takes in, despite legislation by the 2008 General Assembly curtailing benefits for future hires.
Pew said states overall had a funding gap of $757 billion in 2010, the latest year for which statistics were available. States also had a $627 billion deficit in funds for retiree health care.
Such reports on the instability of pension funding always seem to imply that states are doing too little too late in response to a potential disaster. Kentucky tried to address its problems in 2008 with legislation requiring people hired after that time to serve at least 30 years (formerly 27) before qualifying for full retirement benefits. But many still on the payroll fall under the old guidelines.
Other states have taken similar steps. The Pew report said 43 downgraded benefits for future employees from 2009 to 2011. Some have even begun considering reduced benefits for people already retired, to the chagrin of labor unions adamantly opposed to breaking contracts. While Kentucky continues to keep its pension promises, it has suspended retirees’ cost-of-living increases for the next two years.
The economic downturn, which depressed gains on the investments that KRS uses to build up its retirement accounts, is part of the problem, but inadequate contributions from state government over a period in which benefits went up dramatically is a bigger factor. Pension payments of $1.5 billion in the first nine months of the current fiscal year far outstripped the $900 million in contributions and investment income.
In response to the mounting crisis, states have moved toward fundamental changes in the way their retirement programs are structured. Some have shifted from “defined-benefit” systems that pay retirees a fixed amount based on their years of service to a “defined-contribution” approach in which only the amount workers pay into the system is fixed. How much they receive later depends on the growth of their individual investments – just as with the 401(k) plans that have replaced traditional pensions in most private workplaces.
Kentucky Senate President David Williams has been a leading proponent of moving in this direction but he’s gained little support thus far, possibly because legislators themselves are beneficiaries of state-guaranteed pensions that are even more generous than the ones public workers receive. If Williams really wants to advance the cause, he should volunteer to transfer his own accrued benefits to a 401(k) account, with all the attendant insecurity that would entail.
Legislators, like everyone else, know they’re safer with guaranteed pensions than with benefits that flap around with the shifting winds of the marketplace. What they don’t know is how much longer the present system can continue paying out more than it brings in.