A February 11 opinion article in the Paducah Sun took the position that the Commonwealth’s
current defined-benefit pension system needs to be replaced with a 401-k style plan.
Unfortunately, this conclusion is based on some very faulty reasoning.
For example, the author states that the current “royal mess” of the pension system is based, in
large part, on difficulty in predicting: (1) the average length of time that retirees are likely to
collect benefits, and (2) the pension fund’s average investment return. Neither of these are the
reason for the funds’ shortages. Given the large number of retirees, actuarial science can predict
with a high degree of accuracy mortality rates (and therefore how long retirees will learn
benefits). As for investment return, Kentucky’s Teachers Retirement System has earned well in
excess of its assumed rate of return over the past 30 years and its performance ranks easily in the
top 10% of U.S. states.
The author also uses a recent one-week decline in the stock market to conclude “the state cannot
know how much money needs to go into pension funds in order to meet their long-term
obligations.” No one uses short-term fluctuations in the market to help determine its long-term
performance. Numerous research studies conclude that predicting next week’s market return is
virtually impossible; however, predicting the next decade’s market return is much, much easier.
Pension funds are always concerned with predicting long-term returns, not short-term ones.
The author further states that teachers and other state employees strongly objected to replacing
the current defined-benefit program with a defined contribution plan for all future state workers
“for reasons we’re not sure are rational.” Here’s a rational argument: Research studies clearly
show that each dollar saved in a defined-contribution plan provides only half the amount of
retirement income that the current defined-benefit plan provides, due to higher operating costs,
higher fees, and not being able to diversify risks. The state now recognizes this. As acting
House Speaker David Osborne said yesterday, “We have been getting data that would suggest it
actually does cost money to switch everyone to a 401(k)-style plan, short and long term.”
Legislative leaders and out-of- state interest groups keep referring to a “structural problem” with
defined-benefit plans (meaning they need to be eliminated). In reality, defined-benefit plans in
Kentucky do not have a structural problem; they have a funding problem. For almost two
decades, the General Assembly paid only a small fraction of its required contributions into the
plans. Instead, this money was spent for a variety of other non-pension related causes: Medicaid,
construction of government buildings, and a myriad of others. We applaud Governor Bevin for
committing to fully fund the state’s contributions in the future. Defined-benefit plans can work
effectively for both employer and employee when they are properly funded.
(Signed) Marshall Ward, President and the Officers of the Calloway County Retired Teachers Association