Members of the Bluegrass Institute Pension Reform Team Dr. William Smith and Bluegrass Institute president and CEO Jim Waters appeared on “The Rest of the News” with host Dr. Frank Simon. The Saturday interview on Louisville’s 970 WGTK addressed the looming pension crisis in the Commonwealth.
The pension crisis “threatens every aspect of our economy,” according to Waters, which is why the Bluegrass Institute has spent five years working on this issue. It is both a math problem and a policy problem.
Figuring out the cause of the $38 billion deficit is necessary to find a solution. As Waters pointed out, “For years, the politicians have used the pension system to curry political favor. And this has resulted in serious problems.” Ignoring the facts has lead policy makers to promise more benefit than the state can afford.
Dr. Smith expounded on the reason why the pension system has escalated this far: “Employees and employers fund their own benefits. All these systems have a full set of actuarially pre-funded benefits, but those benefits change over time.” Because of retroactively enhanced benefits, the pre-funded account is exhausted.
While the state did perform an audit on the pension system, they only went back to 2004. Dr. Smith for the Bluegrass Institute went back to the beginning of the system, 1958, in order to assess the situation.
Though the unfunded liability is daunting, the Bluegrass Institute believes Kentucky can turn its pension system around. Dr. Smith made it clear that the state cannot, and even should not, roll back the enhanced benefits, but should “stop the bleeding.” Moving forward, “assumptions need to be based on empirical data.” Benefits calculations must be grounded in reality.
Additionally, as the Bluegrass Institute has said for years, the system needs more transparency. While many Kentuckians receive a modest pension, there is corruption in the system. Some private entities crept onto the public pension payroll, such as the Commonwealth Credit Union.
Some of the solutions the Bluegrass Institute proposes include making the pension boards accountable for their behavior. The state needs to set up independent actuarial analyses to assess the system. Crucially, the benefit factors must be set at a level the state can actually fund.