Kentucky To Move All New Hires To 401-K Style Plan

Oct 18, 2017

Credit Associated Press

Most of Kentucky's future public employees would not get guaranteed pension payments under a deal announced Wednesday by the state's Republican leaders who are trying to salvage one of the worst-funded public retirement systems in a country where many such plan are awash in red ink.

The plan to move most new hires into a 401(k)-style system would still put pressure on state taxpayers, who would be legally required to make annual payments of more than $2 billion to the system. That's roughly 20 percent of the state's annual general fund spending.

"This is a big, big cost to the people of Kentucky," Republican Gov. Matt Bevin said, but added it will keep the plans solvent. "If you are working toward retirement and hoping to be a retiree at some point, you should be rejoicing at this bill."

The proposal unveiled by Bevin and the state's top two legislative leaders would require most new employees and others hired after Jan. 1, 2014, to move into a 401(k)-style plan. The proposal still must pass the legislature, most likely during a special session Bevin plans to call before the end of the year.

The plan spares the state's more than 166,000 current retirees from any reductions in their pension checks. But Kentucky would join Michigan as the latest state to embrace a 401(k)-style plan as the savior for their massively underfunded systems.

Under those plans, a public worker contributes to a retirement savings account that also gets contributions from taxpayers.

Under the current plan, workers earn predetermined benefits through the course of their careers and receive guaranteed monthly checks once they retire. Kentucky is at least $33 billion short of the money required to pay those retirement benefits over the next 30 years, with some estimates putting that figure much higher.

Kentucky's pension system routinely ranks among the worst-funded in the country. The Center for Retirement Research at Boston College tracks 170 plans that accept new members. It found that in 2016, none of those plans had a worse funding ratio than Kentucky's, which had enough funds to cover less than one-fifth of its obligations. Retirement systems in Illinois and New Jersey are also in bad shape.

In a June report, Moody's Investors Service found the unfunded obligations for all public employers to be $ 4 trillion. That's more than the federal government spends in a year.

Kentucky's situation is more dire than most, but the picture is bad for government employee retirement funds generally. For decades, governments across the country have promised pension benefits without clear plans on how they would pay for them. Many, including Kentucky, have skimped on payments into the system to help balance their budgets. They relied instead on expected investment returns that haven't materialized.

Kentucky's plan would change some of that, requiring lawmakers to appropriate the full retirement payment every year. Bevin warned that could be as much as $2 billion per year, which will require cuts to other government services.

Under Kentucky's proposed plan, most new hires would be moved into the new system, with the exception of some police officers and firefighters. Anyone hired after Jan. 1, 2014, would also move into the 401(k) plan. Most others will continue earning benefits until they hit 27 years of service or reach age 65, when they will be moved into a 401(k) plan.

Jim Carroll, president of the advocacy group Kentucky Government Retirees, said he appreciates lawmakers' efforts to address the problem but said he opposes the plan because it caps the benefits current workers could earn.

"Proposals to arbitrarily limit the accrual of benefits betray the pension promise and violate the contract rights of Kentucky Retirement Systems members," he said. "We will be conveying our opposition in our outreach to legislators throughout the review process."

Earlier Version:

Current workers would continue accruing benefits under the current system until they turn 65 or hit 27 years of service, when they would be moved into a 401(k)-style plan.

Kentucky is among many states struggling to pay retirement benefits. In June, Moody's found the unfunded obligations for all public employees to be $4 trillion.