Jim Waters: Pension-surplus funds not meant to be spent on higher benefits
Sometimes “no” isn’t just the right answer; it’s the only realistic one.
Kentucky Government Retirees President Jim Carroll told the Public Pension Oversight Board (PPOB) he thinks giving state pensioners a 1.5% cost-of-living adjustment (COLA) for the next five years is the right thing to do considering last year’s record investment returns.
Both history and Kentucky’s present pension predicament – as well as lessons taught from other states – deem Carroll’s request as just wrong for Kentucky.
It would be déjà vu all over again, only worse.
Following a flood of returns of more than 24% – courtesy of the dot-com bubble – into Kentucky’s retirement systems in 1997, political leaders couldn’t bring themselves to say “no” to demands to spend gobs of those additional dollars on sudden, very large pension-benefit enhancements.
The move decimated that retirement system since benefits became unaffordable, applied retroactively and remained at those levels after investment returns plummeted, courtesy of the Great Recession of 2008.
Had benefits not been raised, the system could have weathered the recession’s storms with less damage.
Repeating that mistake now would be a colossal disaster.
When benefits took effect in 1999, the pension system was on much more solid footing with a 122% funding level; now, it’s barely 14% funded.
Forcing such a large benefit enhancement on that system – especially without any adjustment for economic downturns – nearly resulted in state workers not having a pension at all.
Regardless of the Great Recession, those sky-high benefit increases handed out more than two decades ago never declined though investment returns have rarely returned to anywhere near those same levels.
For defined-benefit pension systems like Kentucky’s to work, benefits must be adjusted downward if the market dips.
Carroll’s proposed scenario reflects the reckless approach which led Detroit to declare bankruptcy in 2013.
Detroit would use surplus investment dollars to send bonuses to public workers in the form of what became known as a “13th check.”
This practice severely distorted the system since the city’s returns could never meet the long-term goal.
While no check was sent in years when returns failed to reach expectations, the 13th-check practice resulted in severe shortfalls since surplus dollars during years of plenty were used to spike benefits rather than stored up to prevent downturns during lean years.
Detroit experienced what more than one wag has warned against: “if your outgo exceeds your income, then your upkeep will be your downfall.”
Whether it was disingenuousness or just naivete, Carroll promised his 1.5% COLA increase would end in five years and pensioners’ benefit levels would revert to their previous lower levels.
Rep. Jerry Miller, R-Eastwood, splattered a dose of realism on that promise, calling it “unrealistic to think that you could give somebody something for five years and then take it back.”
Carroll’s proposal to use a single year of excess investment funds to enhance pension benefits for five years is also unsound if we want to solidify the nation’s worst retirement plan.
It also demonstrates limited understanding about the cost of enhancing benefits and role of investment returns in funding defined benefit pension plans.
Kentucky Public Pension Authority Executive Director David Eager rightly admonished that if a COLA becomes a priority for lawmakers, they’ll need to find the $350 million actuaries estimate it would cost to pre-fund a permanent one-time 1.5% COLA for all pensioners.
Such a benefit enhancement cannot come from surplus-investment funds.
State workers haven’t received a cost-of-living increase in a decade and now face higher prices thanks to the inflation caused by Washington’s spending spree.
But what possible justification could there be for Carroll’s proposed benefit enhancement, considering the retirement systems will seek $5 billion in next year’s biennial state budget just to keep swimming toward better waters?
It’s best if lawmakers shut this proposal down now so that the upkeep of even costlier retirement payments doesn’t become the downfall of our state workers’ pension system.
Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free market think tank. Read previous columns at www.bipps.org. He can be reached at email@example.com and @bipps on Twitter.