Kentucky Analysis Dispels Myth of 401ks as Pension Saviors

Actuarial report finds moving to defined contribution plans would increase costs.

Newly elected Kentucky Gov. Andy Beshear has released a financial analysis of a 2017 pension reform proposal that his predecessor Matt Bevin had commissioned and then kept hidden from the public. What the report shows will not be welcome news to those who claim defined contribution plans are the answer to saving struggling retirement systems.

“The proposed 2017 reforms would have cost the state more and forced out many more career employees,” Gov. Beshear said in statement when he made the analysis public last week.

According to the 65-page report, Bevin’s pension overhaul plan would have saved Kentucky money in the short term, but over the long term it would have cost state taxpayers more money while providing fewer benefits for retirees.

“It is unlikely that most of the potential savings will be realized as it is likely the system will experience an increase in the number of retirements when a member becomes first eligible for an unreduced benefit,” said the analysis, “as the new provisions provide a large economic incentive for the member to retire at first eligibility and seek other employment.”

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One of the key aspects of Bevin’s pension reform plan was moving new employees in the Kentucky Retirement Systems into defined contribution plans instead of leaving them in the hybrid pension plan that was established in 2013. But the analysis said that the defined contribution plan would have been more expensive and cost 4% of employees’ salaries rather than the 3% with the hybrid plan.

The Kentucky Center for Economic Policy (KCEP) said “benefits for new employees had already been cut so substantially that there was simply no room to save money from additional cuts, and this shift actually increased costs.”

The report also said that closing the existing plan to new employees would have been costly over the long term because the plan would continue to pay benefits to retired members for many years but would have fewer employees paying into it.

“It is reasonable to conclude that the employer contributions will need to increase to offset the lost earnings,” said the report.

The actuarial analysis estimated that the eventual expected rates of returns in closed plans would have to be between 3.75% and 4.5% rather than the plans’ current assumed rates of 5.25% to 6.25%. It also said that it would have resulted in additional costs of $5 million to $11 million per year over the next 30 years.

Even though the analysis had been commissioned by Bevin when he was governor, he had blocked it from being made public. In 2017, Ellen Suetholz, a former state government attorney and member of the Kentucky Public Pension Coalition, submitted a request that the analysis be made public. But Matthew Kuhn, deputy general counsel for the office of the governor, denied the request saying that the analysis was just a draft and therefore not subject to the state’s Open Records Act.

Beshear, who was Kentucky’s attorney general at the time, found that the denial violated the Kentucky Open Records Act, a decision that was upheld in circuit court. Bevin sought and received a stay from the Kentucky Court of Appeals, which kept the analysis from being made public until it was released last week by Beshear.

“No amount of lipstick was going to make this pig attractive,” Jim Carroll, president of Kentucky Government Retirees, said in a Tweet. “Did Bevin think we didn’t know that closing down a DB plan incurs costs? Did he think we were stupid?

Related Stories:

Kentucky Makes Changes to Free Pension from Funding ‘Death Spiral’

Moody’s: Kentucky Pension Reform Is a Negative for State’s Credit Rating

Kentucky Retirement System’s Unfunded Liabilities Continue to Soar

 

 

 

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