Ky. Public Pension Coalition cautions against moving new state hires to 401(k)-style pensions

08/22/2017 05:15 PM

FRANKFORT – Moving new public workers and teachers to 401(k)-style defined-contribution plans would cost the state more to pay down its unfunded liabilities and lead to lower benefits for future retirees, a group opposing such a plan said Tuesday.

The Kentucky Public Pension Coalition cited a study authored by the Kentucky Center for Economic Policy and Keystone Research Center that said shifting new employees and teachers to defined-contribution plans would exacerbate the state’s ability to pay down tens of billions in unfunded liabilities — $37 billion by state estimates and $64 billion according to Gov. Matt Bevin’s administration – because the current pension programs would be closed to new employees and their contributions.

“That means the additional regular contributions by and on behalf of new workers will no longer be made to those plans,” said Jason Bailey, executive director of KCEP, noting that other states looking at making similar moves project higher costs.

“That will result in the closed plans no longer being balanced by workers of different ages, and as the workforce gets older and more workers retire, the closed plan will have to take on a more conservative investment portfolio. That lowers the investment returns in the plan, requiring the employer to pay much more over time to pay down the liabilities than if it kept the plan open.”

The KCEP study also estimates that defined-contribution plans would require between 42 and 93 percent more to match defined-benefit pension benefits, and if contribution rates remain the same in a 401(k)-style plan, state workers and teachers would see benefits drop by 30 to 48 percent.

Bevin has said he plans to call lawmakers back to Frankfort to deal with one of, if not the, worst-funded state pension plans and that structural changes are necessary in that effort.

Others agree. In a statement Tuesday, the Pegasus Institute called structural changes “a must” for the state’s pension system.

“Policymakers should require level dollar amortization for all of Kentucky’s pension plans and make a statutory commitment to fully fund the ARC,” the group said. “Along with this commitment, we must transition non-hazardous public employees into defined contribution plans. The private sector moved to defined contribution plans to provide retirement security to their employees several decades ago. These plans are competitive, portable and modern — bringing flexibility and retirement security for employees.”

But Brian O’Neill, a Louisville firefighter, cautioned that creating a defined-contribution program for newly hired workers would make Kentucky a less attractive landing spot for prospective employees while also leading to higher turnover.

Transitioning to a hybrid cash-balance pension plan, which includes elements of both defined-benefit and defined-contribution pensions, from a traditional defined-benefit program in 2013 has already caused its recent applicant pools to shrink, he said.

“The average public pension in the state of Kentucky is less than $30,000 a year,” O’Neill said during a news conference in the Capitol Annex. “That is a modest amount that enables workers like myself and all these good people here to retire with dignity. We rely completely on that pension because most of the firefighters, police officers and teachers in this state do not get Social Security.”

Some proponents of moving future public workers to defined-contribution plans say it would match what private companies have done in recent decades.

Bailey says that’s because the private sector faces different legal requirements for defined-benefit plans, such as paying off unfunded liabilities within seven years.

“The public sector is large, permanent employers,” he said. “It makes sense for them to pool assets in one large pool. They have very low administrative costs. They can invest for the long term because they’re not going anywhere, and that’s a way to provide an efficient benefit for the workforce.”


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