The Kansas public employee pension system is under-funded by about $7.7 billion. To stop the bleeding, conservatives in the Legislature propose to move away from the current defined benefit system to one patterned after the 401(k) retirement plans used by most industries today. Teacher unions and other employee groups don’t want to go there.
Defined benefit pension programs promise specific monthly payments, usually for life. In some plans, such as Social Security, the payments may rise to compensate for inflation. They never fall. Predictable pension payments give workers some security and increase their ability to plan ahead.
But defined benefit plans present employers with enormous temptations to cheat. In order to keep the plans solvent over the long term, employers — including the Kansas Legislature in the case in point — must deposit enough in sinking funds every year to build up enough reserves to make the monthly payments when workers retire.
The most common form of employer cheating, and the one employed by Kansas lawmakers, is to assume that money deposited in the reserve will earn an unrealistic return. The assumption in some states is that pension funds will bring in about 9 percent annually. There probably have been a few years, in the go-go 90s, for example, when that much was earned for a little while. Today a return above 3 percent would be considered extraordinary.
In both the public and the private sector, the temptation to underfund pension reserves proves irresistible, year after year.
Yielding to those temptations has left most of the 50 states deeply in the hole and contributed enormously to the downfalls of General Motors and many other private corporations.
CORPORATIONS SUCH as IBM went from defined benefit to 401(k) retirement plans years ago. A 401(k) plan re-quires contributions from the employer and the individual. The money is invested by a money management firm and the account is in the individual’s name. The corporation or hiring entity has no responsibility beyond making contributions required as wages are paid.
There is, in other words, no opportunity for the employer to under-fund — to cheat.
There are two major disadvantages to these individual pension plans from the viewpoint of the pensioner. First, they require contributions from employees, which some defined benefit plans do not; second, the amount of money they generate for pensions at retirement depend on the return realized from the investments made over the years. If the investments do very well, the retirement funds created can be generous. If the stock market and other investment vehicles do poorly, as has happened over extended periods in U.S. financial history, retirees are left with little pension and no wages.
The third, and perhaps most important, negative factor in the 401(k) approach to retirement is that the return cannot be predicted. There is no stability promised.
SHOULD THE Legislature go from the stability of today’s KPERS defined benefit program to a 401(k)-type individual accounts for new employees? Probably. Kansas lawmakers, like those in all but a very few of the other 50 states, can’t seem to resist temptation.
For a current example, the Kansas Senate is proposing to take money that would otherwise go into the KPERS re-serve to spend on special education to avoid losing federal funds annually for years into the future.
The money would be re-turned in the next fiscal year, they say.
But the deficit projected for fiscal 2012 is huge, so KPERS funding is likely to become even more precarious.
Dropping defined benefit pensions in favor of 401(k)-type individual retirement ac-counts may be the only way to protect the state’s public employees from Kansas lawmakers in the long run.
— Emerson Lynn, jr.
N.B. Current and past public employees would continue to be covered by the KPERS program in force when they were hired. Only new employees would be affected by any change in the state retirement system.
