Reforming current pension benefits, ensuring the future survival of the systems – The Bluegrass Institute for Public Policy Solutions
Editor’s Note: The Bluegrass Beacon is a weekly syndicated newspaper column published on the Bluegrass Institute website after being published by national newspapers.
Recent reports of a slight increase in the funding level of the Kentucky Employees Retirement System (KERS) offer some necessary perspectives on the current environment.
Note that KERS was 140% funded in 2000 but decreased to below 13% in 18 years.
Investment returns of more than 20% and a $ 1.13 billion government injection of taxpayers’ money barely moved the needle this year; even after all these dollars, the system is barely 18% funded.
If I were a retiree to the state government, I would certainly not take the view of Larry Totten, who sits on the Kentucky Retirement Systems Board’s Audit Committee, that “this is great” – especially when you consider that taxpayers are already familiar with Washington have to do. caused inflation, which Pac-Man played on steroids with citizens’ paychecks and the state’s two major pension systems, which were targeting $ 4.6 billion in the next budget.
I tend to agree with the pithy forecast by Lexington Herald Leader reporter John Cheves: “Eighteen percent is still dangerously low, possibly just a stock market crash away from catastrophe.”
The teacher pension system wants more than $ 2.5 billion of the requested funds in the state budget for next year.
Even if that happens, recent history shows us that it is nowhere near – and nowhere near – fast enough to simply throw more money at the systems.
Disregarding expenditure – which in the case of pension systems is benefit-oriented – such demands on taxpayers are carried forward with little or no needle movement.
While it would be obviously unfair, and certainly illegal, to either take away achievements or break promises already made, it makes perfect sense to reform those who do not come under Kentucky’s sacrosanct contract with its teachers, including:
Â· Ending the use of the daily sickness allowance to increase the pension.
While local school districts should continue to have the ability to provide retired teachers with a benefit when they do not take their sick leave, those benefits should not be applied to previous years ‘salaries to increase retirees’ lifelong annuity payments.
Allowing sick days to increase final compensation until legislation is passed would ensure that no promises – nor alleged representations – are broken, but would allow the termination of a benefit that currently costs taxpayers around $ 40 million annually.
Â· Eliminated the use of the formula for the maximum three years of compensation for members with longer service.
Currently, each beneficiary starts with a formula that bases their retirement benefits on their maximum five-year salary.
However, this changes to the highest three salary years for beneficiaries who reach the age of 55 with at least 27 years of service.
With more than 73,000 active beneficiaries, abolishing the high three and determining all future TRS pensions based on the highest five annual salaries would reduce costs and make the system more secure by providing both forecast and calculation the future pension eases obligations.
But this doesn’t have to be a bull-in-the-china shop approach.
This can be done gradually by allowing those close to retirement to continue receiving the high-three benefit while allowing those further away enough time to adequately plan for elimination.
Â· Elimination of the 3% multiplier.
Currently, people over the age of 30 can increase their pension from 2.5% to 3% of the final average salary for each year of service.
Thousands of beneficiaries who receive this increase over a period of years are placing unnecessary burdens on the system.
An adjustment to eliminate the 3% multiple could be facilitated by applying it only to people with less than 25 years of service so that they have time to plan – and anticipate – appropriately.
Rigid states that lack constitutional or legal flexibility to manage pension costs as part of the changing economic landscape face the country’s biggest problems.
A 2017 study by the Reason Foundation that analyzed the legal environment related to the ability of states to implement required reforms found that states like Illinois and California are digging their pension holes deeper due to suffocating constitutional and / or legal regulations.
Kentucky must use its ability to implement permissible – and necessary – reforms that can bring about significant changes in its pension systems that would at least allow it to stop digging.
Jim Waters is President and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free market think tank. Reach out to him at [email protected] and @bipps on Twitter.