Retirement woes mount

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Financial trends highlighted by a recent news story seem likely to increase pressure on government to shift more of the burden for its retirement funding from the public to public workers.

The problem, recognized by individuals in the private sector who already bear responsibility to save for their future, is simply that investing doesn’t pay as much as it once did. The Courier-Journal reported that the Kentucky Retirement Systems, facing a $19 billion unfunded liability, is still (unrealistically?) projecting a 7.75 percent return on investments over the next 30 years, even though it’s made just 5.5 percent in the past decade.

We’re always admonished to keep in mind long-term trends that show the stock market inexorably rises, even taking into account the Great Depression of the 1930s. What the experts might not tell us is that anyone who was banking on investments to support a comfortable retirement in 1929 got a big splash of cold water when the market crashed that year, and prospects didn’t improve until World War II started the American economy growing again. Many didn’t live long enough to cash in.

Pension systems, public or private, are supposed to even out the bumps so that retirees don’t have to strike it rich in the market or else resign themselves to dying in poverty. The public sector has been diligent – excessively so, some say – in protecting its workers and retirees from investment calamities. To do so, it has to invest retirement dollars prudently but not so conservatively that growth fails to keep up with obligations to the workers. It’s incumbent on political leaders to ensure the retirement systems get enough cash to grow that money without being forced to make reckless investment choices.

KRS Executive Director Bill Thielen said critics should understand that retirement system planners take a long view. Even though investment returns have been sluggish or worse the past few years, things can always turn around in the course of time. But because of state government’s anemic contributions and the necessity of meeting present-day obligations, the retirement system has had to sell off investments that might have improved those long-term prospects.

Governments have traditionally pitched generous retirement plans to compensate for relatively low public salaries. Following steady benefit growth in better times, there are second thoughts now about the long-term commitments that were made. The Associated Press said cities and states nationwide need $1.4 trillion to keep their pension promises. If investments don’t get the job done, they’ll have to raise taxes or cut services to close the gap.

Another option is to trim benefits. Four years ago, Kentucky decided future public workers would have to put in at least 30 years of service to collect full benefits. (Those hired before the change of policy can still draw full retirement after 27 years.) Annual cost-of-living adjustments for public pensions are currently suspended. Additional cutbacks may be necessary.

States that act more aggressively to control pension costs risk inflaming organized labor. While Rhode Island officials say they’ve saved billions by adding 401(k)-style features to traditional pensions, unions are going to court to make the government meet prior commitments. Other states face similar challenges.

For now, the public sector is virtually the last stand of guaranteed retirement security in Kentucky. A pension reform task force is weighing recommendations which could determine how much longer this holds true.

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