Bluegrass Beacon: The due process of defining pension benefits

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Editor’s note: The Bluegrass Beacon column is a weekly syndicated statewide newspaper column posted on the Bluegrass Institute website after being released to and published by newspapers statewide.

“Can pension benefits be cut?” My answer to the reporter’s question may sound political but when it comes to Kentucky’s responsibility to its public servants, it’s nevertheless true: “It depends.” The commonwealth’s moral obligation to protect properly earned and funded pension benefits doesn’t extend to improperly awarded ones. Just because some group of politicians in the past improperly awarded new benefits or enhanced existing ones doesn’t mean future generations of Kentuckians should be forced to pay the bill for time and eternity for such gravy trains. Unfortunately, beneficiaries, retirees and even legislators have been misled to believe that any benefit ever granted at any time or level and for any reason – regardless of actual rules or the commonwealth’s ability to pay the bill – is inviolable. “We will not accept cuts to benefits promised under an inviolable contract,” wrote retiree activist Jim Carroll in a letter appearing in several newspapers. “If a bill is considered that reduces promised benefits, we will storm the Capitol with torches and pitchforks. If it is signed into law, we will litigate.” That’s a wonderfully emotional statement designed to fire up a base of misinformed beneficiaries and retirees.

Here’s the rub: what benefits are promised “under an inviolable contract?” Carroll rightly notes that previously awarded cost-of-living adjustments (COLA) not only no longer exist for Kentucky Retirement Systems’ participants but also that such benefits were “a contributor to our unfunded liabilities.” COLAs still exist for Teachers’ Retirement Systems’ (TRS) beneficiaries, and thus – take Carroll’s word for it, not just mine – remain “a contributor to our unfunded liabilities.”

Plus, they are only one of many benefit enhancements that have helped dig Kentucky’s deep, dark pension hole.

The biggest shovel of all in digging that hole in each of the state’s retirement plans have been decisions, primarily by past legislators, to increase benefits in a particular year and then apply those gifts to all previous years of beneficiaries’ service.  The very nature of a defined benefit pension system is that the level of benefits fluctuates each year according to actuarial assumptions considered each year, including investment returns, longevity, growth rate of salaries and payrolls, retirement age and attrition rates. When, for example, investment returns are estimated to be higher, it may be possible to properly fund a higher benefit factor for that year because it is actuarially sound and properly funded. But for beneficiaries to be led to believe that the commonwealth has a moral obligation to keep the rate at that level and to never lower it for years when returns are down is the worst kind of fake, even fraudulent, news. Retirement benefits are to be determined annually by the systems’ actuaries based on solid, credible data on what the commonwealth can actually afford. They form an agreement between the state, employees and taxpayers that’s smashed and broken when policymakers in future years reach back to increase the benefits from previous years. Doing so is the equivalent of believing that while your personal investment in a money-market account offered a 3-percent return one year, 5 percent during another and 8 percent this year that you’re entitled to an 8-percent return ad infinitum for all years – both past and present.  While the state has a moral obligation regarding benefits properly established, no such obligation exists for arbitrary benefits or those awarded either retroactively or prospectively without the due process of the actuarial process.

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 jwaters@freedomkentucky.com and @bipps on Twitter.