Bluegrass Beacon: New pension paradigm protects taxpayers, benefits workers

Rep. Jerry Miller, R-Louisville, was on the right side of principle when he said recently on KET’s “Kentucky Tonight” program that he doesn’t deserve to be re-elected if he doesn’t have the “courage to make the right vote for Kentucky.”

There’s no question that Miller, like other conservatives who’ve expressed similar sentiments – including Gov. Matt Bevin, have the right motives and sentiments regarding leadership and votes on politically tough issues.

But what if you could simultaneously choose both the right and best options, secure enough votes for passage and then live politically to fight another day for policies that build upon those reforms and make Kentucky an economic powerhouse?

Moving state workers and teachers into a defined-contribution system where they, as beneficiaries, have more responsibility while eliminating taxpayers’ risk is undoubtedly the right move from a politically conservative and philosophical viewpoint. However, isn’t it also right to ensure that retired teachers don’t outlive their resources and end up on welfare?

Stopping the digging of our seemingly ever-deepening pension hole by ceasing to promise or provide arbitrarily-enhanced benefits at levels that are neither affordable nor legal is right.

So is ensuring that the retirement plans into which beneficiaries and retirees have contributed are stable and remain sustainable in order to provide promised defined benefits. Keeping promises; protecting taxpayers. Both are right.

The Bluegrass Institute Pension Reform Team’s new proposal does all of those “right” things but looks different than any previous model. This new paradigm establishes benefits based upon a fixed percentage-of-payroll contribution combined with the overall performance of the systems. It proposes a 15-percent payroll contribution for Teachers’ Retirement System (TRS) members, with employees contributing 9 percent and the employer – taxpayers – kicking in 6 percent.

Unlike the current setup, where the systems’ bureaucrats run to lawmakers incessantly with both hands out looking for more money from taxpayers to cover unfunded liabilities, this new approach offers incentives for the systems to avoid such deficits altogether by requiring administrators to lower benefits in order to address previous shortfalls. Taxpayers are protected by ensuring that their payroll contribution as the employer remains steadfast at 6 percent throughout the whole process.

While we proposed the above approach specifically for TRS, it can be used with any defined-benefit system, with the contribution levels negotiated between the state and its workers. The systems would be incentivized to establish much more conservative investment-return assumptions since beneficiaries rather than taxpayers would be on the hook for liabilities created by overly optimistic assumptions.

More conservative assumptions combined with expected brisk returns during upcoming years would also create a splash of surplus funding for paying down the current $65 billion unfunded liability, improving Kentucky’s credit rating and lowering borrowing costs needed to build new schools and courthouses.

Beneficiaries should demand that their groups’ talking heads – who spend excessive amounts of time in Frankfort but little time listening to constituents – get on board with this approach, which:

• removes control of the pension system – primarily the establishment of benefits – from politicians and gives it to the systems’ administrators

• guarantees the systems’ solvency, unlike the hard landing that comes with placing all new hires into a straight 401(k)-style system, which will divert funds needed for stable cash flow, result in lower investment returns and force liquidation of remaining investments just to cover the next round of benefit payments

• offers security by guaranteeing adequate funding for a lifetime via defined benefits that are always fully funded while avoiding the deep hole of costly unfunded liabilities

It would be both courageous and “right” for policymakers and beneficiaries to lay down their ideology and consider a plan that gives taxpayers the protections of a defined-contribution plan, beneficiaries the security of a solvent defined-pension benefit and Kentucky a brighter new year.

Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. Reach him at jwaters@freedomkentucky.com and @bipps on Twitter.