State should fully fund KPERS, not substitute 401(k)s

Kansas teachers, firemen, city employees and all of the others who work in the public sphere look forward to pensions from the Kansas Public Employees Retirement System (KPERS) based on their earnings history and the length of their service.
But KPERS, along with most other defined benefit retirement funds in the nation, has been hit hard by stock market losses. While it has about $10 billion invested, that’s down sharply from pre-recession levels. An analysis by the Center for Applied Economics said KPERS is bankrupt. Glen Deck, executive director of the system, disagrees and tells state workers “our current benefits are safe,” but carefully avoided a long-term analysis.
The Pew Center for the States is more guarded. It says KPERS reserves are about 70 percent of the amount needed to pay future benefits assuming that the reserves build up as can be historically anticipated. Actuarial calculations indicate that pension reserves should be at 80 percent of future demand to be safe.
Kansas pension reserves are low for two reasons: (1) past Legislatures set aside less each year than recommended by fund managers, depending on continued growth of stock market values to cover them; (2) the stock market tanked in 2008 and remains more than 4,000 points below its peak.
Dire forecasts have prompted some Republican leaders in the Legislature to recommend moving away from the current defined benefit system to the 401(k) retirement system broadly used by individuals and smaller businesses.
Defined benefit plans promise specific pension levels. Some include automatic increases to cover inflation. In Kansas, KPERS checks have been increased from time to time by the Legislature to recognize cost of living increases. In contrast, 401(k) plans provide income determined by the dividends and interest earned by the money invested. Most 401(k) plans are funded jointly by employees and employers. Many of them allow employees to choose among retirement investments accounts, so that some can choose aggressive investments while others may decide on less risky ones.
The current recession devastated all 401(k) accounts, risky or otherwise. Many who held them and had planned to retire in the last three years stayed on the job because the income they had planned on had evaporated.

THE IMPACT on the Kansas public employee work force of dropping the defined benefit system in favor of a 401(k) plan would be staggering.
The promise of a relatively early and adequate pension is a powerful incentive to choose teaching or some other public job. Take that prospect away and it will be necessary to increase wages and other benefits to keep those ranks full.
Early retirement, health insurance, vacation benefits and pension checks that don’t depend on the state of the economy are the perks that bring well-qualified applicants to public jobs and keep them there for 30 years or more. Erosions of that catalog of benefits will drive down the numbers who apply for those jobs and send the best qualified to the private sector.
Those who argue that 401(k) accounts will provide a better retirement and point to stock market average gains over history need to think again. It is true that investments in stocks — all of the stocks in the exchanges — have paid about 9 percent a year over history. It is also true that some who invested their savings in a particular batch of stocks wound up with nada, nothing, zero.
Moreover, it is true that those who had very substantial 401(k) accounts in 2005, have seen that account lose as much as 40 or 50 percent in the last three years. Those who reach retirement age when an economic cycle hits a nadir are out of luck — and money — at no fault of their own. And it is altogether possible that many of those accounts will never regain their 2005 value.
In his first term, President George W. Bush wanted to move from the defined benefit system provided by Social Security to savings accounts which would have grown or shrunk along with the stock market. Tutored by the huge run up of equities in the decade of the ’90s, many agreed with him. But his argument never caught fire with the general public, which perhaps remembered stock market crashes of the past and decided they would rather stick with a bird in the hand rather than gamble on Wall Street.
How wise their caution now seems.

— Emerson Lynn, jr.