Among the thorny questions that continue to bloody Kansas lawmakers is whether to change the public employees pension system and how to fund it adequately.
The current KPERS pays retirement pensions based on salaries earned while em-ployed and years on the job before retirement. It is a set formula which allows a teacher or other public em-ployee to calculate exactly what his or her monthly pension will be.
To provide the money needed to pay retirees the Legislature must appropriate and invest money each year. The amounts needed are calculated by actuaries, using formulas that include a predicted rate of return on the money invested and the number of retirees to whom pension payments must be made. Longevity estimates must be made to predict the number of pensioners.
KPERS is underfunded by about $7.7 billion at the present time due to a combination of factors. Actuarial errors in the past caused part of the problem. Overly rosy investment return calculations proved devastating when the Great Recession brought interest and dividend returns crashing down along with equity prices. And the Legislature often took the easy way out by deciding to underfund the program rather than raise taxes or cut spending elsewhere to keep the state budget in balance.
This combination of failures has prompted Gov. Sam Brownback and the conservative majority in the House to advocate changing the retirement system from the present defined benefit plan to a 401(k) system in which each employee would have an individual retirement account into which the governmental unit and the worker would each make contributions from each paycheck.
At retirement, the employee would draw from the account an amount made possible by the return on the investments made over the years of em-ployment and from the principal created. A 401(k) pension is not guaranteed, but is determined solely by the amount placed in the account and the amount earned from investing that principal.
The advantage to the governmental units is huge. They can’t fall behind and face enormous unfunded obligations. But 401(k) plans are often opposed by employees and the unions which represent them because the pension payments are not guaranteed but depend on the ups and downs of equity markets, interest rate patterns and dividend totals.
Consider, for example, that returns on 401(k) plans over the past five years have been miserable because of the recession; in many cases, the value of the accounts fell so that the account-holders were farther from retirement security rather than closer.
Over the average working lifetime, however, a well-funded 401(k) plan, if competently managed, should provide pensions that could be depended upon.
THE KANSAS experience argues for switching to the 401(k) approach. Not because it provides a better pension for government employees, but because state lawmakers can’t be depended upon to fund a defined benefit program as the math demands. It is simply too tempting to cheat when it comes to budget balancing time and put off the pension investment until next year. Or to do self-deceiving things like assuming a 9 percent annual return on investments, allowing a smaller annual investment. Changing to the 401(k) approach would keep the government units honest.
But making the change can be seen as a threat to the employees, for the 401(k) system depends on market forces which neither government nor employee can control. The certainties gained by government would produce uncertainties for its employees. To make the trade-off more equitable, government should agree to increase its contributions to the employee plans when investment income drops. Without some compensation for bad times, all of the risk would fall on the workers.
It is, indeed, a thorny question, which should have thorough, well-informed study before decisions are made.
— Emerson Lynn, jr.
