Surplus pension funds are not meant to be spent on higher benefits | Opinion

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Sometimes “no” isn’t just the right answer; he is the only realist.

Kentucky Government Retirees Chairman Jim Carroll told the Public Pension Oversight Board (PPOB) that he believes offering state retirees a cost of living adjustment (COLA) of 1.5% for the next five years was the right thing to do given last year’s record ROIs.

The history and current state of Kentucky’s pensions – along with lessons learned from other states – sees Carroll’s claim as simply bogus for Kentucky.

It would still be déjà vu, but worse.

Following a surge of returns of more than 24% – thanks to the dot-com bubble – into Kentucky’s pension systems in 1997, political leaders could not bring themselves to say “no” to demands to spend. amounts of those extra dollars for sudden spending, very large pension benefit enhancements.

This decision decimated this retirement system as benefits became unaffordable, applied retroactively, and remained at those levels after falling investment returns, thanks to the Great Recession of 2008.

If benefits had not been increased, the system could have weathered the storms of the recession with less damage.

To repeat that mistake now would be a colossal disaster.

When the benefits came into effect in 1999, the pension system was on a much more solid footing with a funding level of 122%; now it’s barely 14% funded.

Forcing such a big increase in benefits on this system – especially without any adjustment for economic downturns – almost resulted in state employees getting no pensions at all.

Regardless of the Great Recession, those dizzying increases in benefits paid over two decades ago have never diminished, although returns on investment have rarely returned to levels close to those same levels.

For defined benefit pension plans like the one in Kentucky to work, benefits must be adjusted downward if the market goes down.

The scenario proposed by Carroll reflects the reckless approach that led Detroit to declare bankruptcy in 2013.

Detroit would use the excess investment dollars to send bonuses to public workers in the form of what has come to be known as the “13th check.”

This practice severely distorted the system since returns from the city could never achieve the long-term goal.

Although no checks were sent in years when returns fell short of expectations, the practice of the 13th check resulted in severe deficits as excess dollars during years of plenty were used to increase benefits. rather than stored to prevent slowdowns during lean years.

Detroit has known what more than one wag has warned against: “If your expenses exceed your income, then your upkeep will be your loss.”

Whether it was dishonesty or simply naivety, Carroll promised that his 1.5% COLA increase would end in five years and that retiree benefit levels would return to their previous lower levels.

Rep. Jerry Miller, R-Eastwood, splashed a dose of realism on the promise, calling it “unrealistic to think you could give someone something for five years and then take it back.”

Carroll’s proposal to use a single year of excess investment funds to improve pension benefits for five years is also unfounded if we are to shore up the nation’s worst pension plan.

It also demonstrates a limited understanding of the cost of benefit enhancement and the role of investment returns in funding defined benefit pension plans.

Kentucky Public Pension Authority executive director David Eager has rightly rebuked that if a COLA becomes a priority for lawmakers, they will need to find the $ 350 million actuaries estimated it would cost to pre-fund a COLA. permanent at 1.5% for all retirees.

Such an improvement in benefits cannot come from surplus investment funds.

State workers haven’t enjoyed a rise in the cost of living for a decade and now face higher prices thanks to inflation caused by Washington’s spending spree.

But what possible justification could there be for the benefit improvement proposed by Carroll, given that pension systems will seek $ 5 billion from next year’s biennial state budget just to keep swimming towards better waters?

It is best that lawmakers end this proposal now so that sustaining even more expensive pension payments does not become the downfall of the pension system for our government employees.

Jim Waters is President and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free market think tank. Read the previous columns on www.bipps.org. He can be contacted at [email protected] and @bipps on Twitter.

Jim Waters is President and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free market think tank. Read the previous columns on www.bipps.org. He can be contacted at [email protected] and @bipps on Twitter.


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