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Archive for Monday, April 25, 2011

Key Kansas House member insists on 401(k)-style pension plan

April 25, 2011, 8:18 a.m. Updated April 26, 2011, 1:50 a.m.

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— Moving to a 401(k)-style plan for Kansas teachers and government workers could slow efforts to eliminate the state retirement system’s long-term funding problems, according to a report released Monday that also shied away from taking sides in the Legislature’s debate over pensions.

The report, prepared by actuaries for the Kansas Public Employees Retirement System, projected lower long-term costs for the state under legislation approved by the Senate last month than under a bill passed by the House, also in March. The report also said the House plan could lower monthly benefits for retirees.

Three senators and three House members must reconcile their chambers’ differences and opened negotiations Monday. The House’s pension bill would put public employees hired after June 2013 into a 401(k)-style plan, while the Senate’s legislation calls for a commission to study that idea and others.

The state pension system projects a $7.7 billion shortfall between anticipated revenues and benefits promised to public employees through 2033. Legislators expect to pass a bill addressing those long-term funding woes after they reconvene Wednesday to wrap up business for the year.

Leaders of the House’s Republican majority see a 401(k)-style plan as important to solving the pension system’s problems because such a plan would tie retirement benefits to investment earnings. The state’s traditional plans guarantee benefits up front, based on a worker’s salary and years of service — and long-term funding shortfalls develop when revenues don’t keep up with the promises.

But the new KPERS report said starting the 401(k)-style plan adds some costs even as the state closes the long-term funding gap in its traditional plans, helping to make the gap in the state’s and local governments’ costs between the House and Senate plan about $1.2 billion through 2033. Still, KPERS officials declined to say whether the House or Senate plan is better.

“There are pros and cons they’ve got to weigh,” said KPERS Executive Director Glenn Deck.

House Pensions and Benefits Committee Chairman Mitch Holmes, a St. John Republican and his chamber’s lead negotiator, went into the talks promising to hold out for a 401(k)-style plan. He didn’t back away after seeing the new numbers from KPERS.

“I think we need time to digest them,” he said.

Sen. Jeff King, an Independence Republican and his chamber’s top negotiator, said the numbers reflect a need for lawmakers to “move at a deliberate pace” — supporting a study commission.

But the report’s message seemed clear to public employee and retiree groups, which oppose moving toward a 401(k)-style plan.

The report said a worker retiring after 30 years of service, with benefits based on a salary of $40,000, now would be guaranteed $1,750 a month. The report projected a monthly benefit for the same worker of just over $1,100 under the House’s 401(k)-style plan — though KPERS officials cautioned that the figure was based on pre-retirement investment earnings averaging 7 percent a year, lower than what KPERS assumes for itself.

“The Senate plan is head and shoulders above the House plan,” said Terry Forsyth, a lobbyist for the Kansas-National Education Association.

But supporters of moving to a 401(k)-style plan argue the state can’t afford to sustain its traditional plans indefinitely. GOP Gov. Sam Brownback predicted last week that even a study commission would recommend at least offering a 401(k)-style option to new hires.

Both chambers’ proposals do commit to higher annual state contributions to KPERS. The Senate’s bill would boost the state’s annual contribution to KPERS by $23 million, starting July 1, 2013. The House plan raises the annual contribution by about $10 million.

And the Senate’s legislation also would require most public employees to pay a higher percentage of their salaries into KPERS.

The House plan not only would make the 401(k)-style plan mandatory for teachers and government workers hired on or after July 1, 2013, it would cut the future benefit of other workers who chose to stay in the state’s traditional plans.

The KPERS report said the increases in the state’s contributions to the pension system wouldn’t be permanent after the long-term funding gap began to close. Under both the Senate and House plans, the state and local governments ultimately would spend less through 2033 than it if made no changes in the pension system and tried to close the funding gap with only higher contributions.

The report said ultimately, the state and local governments would save $3.6 billion on its contributions through 2033 under the Senate plan and about $2.4 billion under the House plan.

Comments

jafs 3 years, 7 months ago

So, somebody who's worked for the state for their entire adult life will see their benefits decreased if they don't "voluntarily" change to a 401K program?

What ever happened to breach of contract? These folks have lived up to their end of it by working for the state - shouldn't the state have to live up to their end?

Something needs to be done to ensure the sustainability of KPERS, without question, but this seems like a very bad idea to me.

notanota 3 years, 7 months ago

The House is run by nincompoops and I don't see that version passing or surviving a court challenge, but yeah, that's what it sounds like they want to do.

pittstatebb 3 years, 7 months ago

And when the money in your 401k runs out during retirement it is gone. KPERS pays until you are dead.

Any employee sponsored 401k never gives you full control because you are only offered a limited number of securities to invest in.

The House plan will pay less into the 401k from the state side than KPERS employees are currently getting from the state.

Please research the realities of the 401k retirement plan. Because private employee sponsored 401k's do does not require a set amount of contribution by law (although the house plan would), workers are not contributing enough to their plans to have enough money to retire. Private employers have 0 incentive to increase the amount their workers contribute (higher matches means less profit for the employer). 401k's are only a good fit for high income earners who are putting their 16.5k in a year and are knowledgeable enough to understand the market or have a financial advisor. Most KPES employees will not fall into this category.

Read: http://online.wsj.com/article/SB10001424052748703959604576152792748707356.html

I do not agree that the 85% of final salary is needed for retirement, but the numbers are still scary.

notanota 3 years, 7 months ago

You should talk to my dad. He loved having his 401k value plunge just after he retired, even after the supposedly conservative balancing he'd done.

notanota 3 years, 7 months ago

Good luck living off the interest in a retirement account made up entirely if slow-growth funds like that.

notanota 3 years, 7 months ago

So you are retired right now and living off of interest income in funds you got entirely at a 9.5% (6% employee, 3.5% matching) salary investment into a 401k from the limited fund choices your employer gave you? Because that's the House proposal.

notanota 3 years, 7 months ago

Well, congratulations! You have a BETTER plan than what you want to foist on teachers. the proposed legislation is only at 9.5%.

Let's go back to your original question: Who wouldn't want a 401k style retirement plan? Anyone with KPERS, that's who.

Eride 3 years, 7 months ago

If your dad was even approaching retirement (much less actually having reached retirement) his investments should have almost completely switched into low risk securities.

That is finance 101. Whoever was advising your father (or if your father was "advising" himself) is an idiot.

notanota 3 years, 7 months ago

I do believe he had what were considered to be low risk retirement vehicles at the time. Little known fact: The bond market crashes sometimes, too. Look at historical rates in 2009. Oops.

He's still retired and hasn't started buying catfood yet, so it wasn't a disaster. But it could have been, and that's my point.

notanota 3 years, 7 months ago

Only for what was already there. You try to purchase new funds from your automatic paycheck allocation or shift investments, and you're stuck with the crashed rate.

Eride 3 years, 7 months ago

You are wrong, if he were in low risk securities he wouldn't have "lost" anything.

jafs 3 years, 7 months ago

"low risk" is not the same thing as "no risk".

And, those saving for retirement often need to not only not lose money, but make more money, and be able to count on some investment income from that money as well.

question4u 3 years, 7 months ago

Many university faculty have delayed retirement during the past several years because their investments are no longer providing a sufficient return. Change to a 401K retirement plan for all state workers may be inevitable, but I can't imagine anyone who wouldn't prefer a properly funded pension plan after seeing what can happen to 401k holders in a down economy.

average 3 years, 7 months ago

The Senate plan (KPERS as-is but crappier) is what will pass. There have been plenty of GOP majorities in both chambers with GOP governors in the past. If they wanted it to happen they would have. Years ago.

The problem, from their POV, is that you actually have to put money aside in trust for a 403b plan. You can't just put in future promises, like they do with KPERS contributions. And the legislature doesn't want to start having to fund plans like that.

jafs 3 years, 7 months ago

How is that working out for the large numbers of people who have recently lost money in their 401K plans, just as they were planning to retire?

notanota 3 years, 7 months ago

Except for a couple of things - the state guarantees the payout for KPERS, and they still have the payments of current members to partially offset the losses in years when the economy is tanking. In a 401k, it's entirely on the shoulders of the individual investor to hope that he or she made the right gambles with that nest egg. It's gone? Too bad. Get a job.

jafs 3 years, 7 months ago

It's one thing to say "let's cut the KPERS program", and it's quite another to say "people will do better on their own".

The first one is debatable based on a variety of factors, while the second is flat out wrong.

notanota 3 years, 7 months ago

Exactly. Plus its actually more expensive for us as taxpayers to adopt the House plan, so I'm going to debate the "let's cut the KPERS" idea, too.

notanota 3 years, 7 months ago

I'd be more than happy to get more of all of those things, but as it happens, I'm not a teacher. Nice try, though.

coloradoan 3 years, 7 months ago

KPERS is supposed to consist of multiple parts: the employees' contributions, the employers' contributions, and the growth achieved through sound investing. The employees have always made their contribution, since they have no choice. The growth component has failed us in these repeated market downturns. But above all, the fact is the Legislature refused to appropriate the state's contribution to KPERs. If you don't put the funds in - as promised - then there's nothing there to grow.

We employees have paid our share per the agreement; nnow it's time for the Legislature to step up.

coloradoan 3 years, 7 months ago

KPERS is supposed to consist of multiple parts: the employees' contributions, the employers' contributions, and the growth achieved through sound investing. The employees have always made their contribution, since they have no choice. The growth component has failed us in these repeated market downturns. But above all, the fact is the Legislature refused to appropriate the state's contribution to KPERs. If you don't put the funds in - as promised - then there's nothing there to grow.

We employees have paid our share per the agreement; nnow it's time for the Legislature to step up.

average 3 years, 7 months ago

I'm not saying it would or wouldn't be better for the beneficiaries. I'm saying that the legislators have enjoyed the slush fund for a long time, the transition to D.C. would bring forward the reckoning-day on their history of underfunding KPERS-as-it-is, and so I find it hard to believe it's actually going to happen. If the GOP powers in Topeka really wanted it, they could have done it 10-15 years ago (Graves' era). The fact that it didn't happen then suggests it's no slam dunk to happen now.

notanota 3 years, 7 months ago

The Senate knows this, but the House is full of math stupid and magical thinkers. The other problem with transitioning to a 401k style plan is that you still have to pay the benefits of current retirees until they all die, and that means the state would be paying a lot more in the long run to transition to this supposed cost saving plan.

nativeson 3 years, 7 months ago

Defined benefit pensions plans are a thing of the past except for government and heavily unionzed industries. KPERS simply won't exist in the future without being seriously modified. At least the state is willing to take on funding issues that are clearly out of control and will not be brought back into line without significant modification.

Entitlement programs are nice when they are started, but they often become difficult to unwind once they have excessive cost. Defining a benefit for an employee based on age and years of service without consideration of market conditions will not work in this economy. Most workers have lost at least 5 years of retirement income in the most recent recession. To expect state employees to be made whole in these conditions on the backs of workers who fund the program is unreasonable.

This is not a breach of contract. It is renegotiating the terms of a contract to provide the best outcome for both parties. Something less than would have received in the future is better than receiving nothing at all. That is the state of underfuinding now with KPERS.

jafs 3 years, 7 months ago

It is a breach of contract, if folks made long term employment decisions based on the KPERS system, and promised benefits.

I agree that it needs to be modified in order to be sustainable, as does Social Security.

The state could and should have been living up to the funding it was supposed to provide, and should be more realistic in their projections of investment income.

That's two ways right there that would help.

notanota 3 years, 7 months ago

Unless you expect the economy to be bad for the next thirty years, it's a bit of a drastic fix to end it all now. The senate plan, from what I can see, seems like a reasonable fix with more money paid in by both employees and the state, but the house plan is a short term fix with a long term cost, since the state would still be obligated to pay the benefits for everyone who retires before it gets switched to the crappy 401k plan. That's all money going out with none coming in. Talk about financing it on the back of taxpayers!

jafs 3 years, 7 months ago

That's probably why they're proposing to reduce benefits on those who choose not to change to 401K's.

notanota 3 years, 7 months ago

They can't reduce benefits on the people who have already retired, though, so they'd still be paying for that, and although they're reducing the multiplier, they're not getting rid of KPERS, so the closer you are to retirement, the more likely you are to just keep with KPERS.

lawslady 3 years, 7 months ago

The court has already spoken on this issue once; the Legislature can amend a retirement plan going forward. But they cannot, after the fact, take away benefits ($) that has already been earned/vested. That is breach of agreement. Workers agreed to work for XYZ if they got ABC. They worked for XYZ. They earned ABC. If the Legislature wants to avoid a messy losing law suit, they will only tinker with KPERS going forward.

lamb 3 years, 7 months ago

The article you referenced was absolutely incredible!!! I did not know this benefit was going to the legislators! It is also a shame that we have to go to another paper to get this kind of information. Why didn't the Journal World tell us this??? They are sitting on their hands rather than doing good journalistic investigation and reporting.

I am appalled at the the legislators and their greedy ways. They make me sick.....

Gary Denning 3 years, 7 months ago

We should agree to continue the current plan for those employees already in the system but scrap it for new state employees. In addition to the KPERS funding issues, the idea that teachers and others in their mid 50's should be allowed or even encouraged to retire is simply not realistic. They are still vital and have a lot to give to their profession but they are allowed to retire early, with full retirement (and of course they teach at a school 25 miles down the road while receiving their retirement).

This was a nice idea when it started but makes little sense in comparison to other professions.

pittstatebb 3 years, 7 months ago

But is makes a lot of sense for local districts to have high paid employees retire so that they can hire back lower paid, new teachers. Not only are they lower paid, but they feel obligated to accept supplementals (coaching, sponsoring, etc) to get a job.

The district sees a financial plus from teachers retiring and it is good for the profession to introduce new energy, ideals, etc.

Now, is it good for the taxpayer as a whole?

coloradoan 3 years, 7 months ago

The counterpart to this is, and it is a potentially huge issue going forward, that the existing generation needs to move on to make room for the next generation to develop their careers. Until we move on to retirement - which can include other work, volunteering, and other activities, there are no oenings for the next class of kids. Their dreams are frustrated, they sit idle, and the development of social schisms begins. Just look at Libya, Syria, Yemen, and maybe France. But with the efforts in our own Legislatures to breach the employment contract provisions, especially with respect to the retirement component, employees just try to hang on, leaving no openings for the next generation. How are we better off?

jafs 3 years, 7 months ago

Generally, when you retire "early" with KPERS, you get reduced, not full, benefits.

verity 3 years, 7 months ago

Depends on how long you have been contributing to KPERs. If your age plus years of employment equals 85, you get full retirement. But staying longer will add some to your pension.

jafs 3 years, 7 months ago

Yes, but that's not considered "early" retirement.

"they are allowed to retire early, with full retirement"

verity 3 years, 7 months ago

I don't find the statement "they are allowed to retire early, with full retirement" anywhere, so am not sure what you are referring to.

Maybe I am wrong, but I took "early" to mean retiring before the age of 65. If you are 58 and have worked for the State for 27 years, you would get full benefits.

strongarmcrunch 3 years, 7 months ago

Putting your savings in the US stock market is the wrong thing to do. The Market is fundementally broken, crooked to the very core, heavily manipulated, and ungoverned.

I would like to see a retirement plan that helps fund state and local investments.

Maybe these failing and faulty GOP members of the Kansas House should have thought about financial issues when it came to sending their guards to Iraq on a very dubious, unfounded invasion and occupation overseas. Maybe they should not have believed the Bush lies. Maybe they should have protested Bush for bumping a lot of federal expenses onto the states. Maybe they should have put on their thinking caps for once and said NO to Bush, said No to the GOP and all political parties, and been more loyal to their state and the conditions within their state.

strongarmcrunch 3 years, 7 months ago

You want to make a investment for the future? Buy farmland.

verity 3 years, 7 months ago

I take it you are referring to farm land and not the Farmland site in Lawrence.

Not necessarily so easy to come by and generally quite expensive (80 acres in an eighth section x several thousand dollars an acre) and then you have to do something with it. From my experience, the income is generally not a very high percentage of investment. Lots of expenses that people don't consider. If you've already got it, fine, but trying to buy it maybe isn't the best idea.

ResQd 3 years, 7 months ago

Does anyone know if you were to retire before the 2013 deadline, if you will get your full retirement benefits, or will it be cut?

jafs 3 years, 7 months ago

Not clear at this point, to me.

I'd say wait and see what they pass first. If the above is true, I predict we may see more folks retiring before that time.

notanota 3 years, 7 months ago

My guess is that you get your full benefits as long as you retire before any changes occur.

verity 3 years, 7 months ago

"The report also said the House plan could lower monthly benefits for retirees."

I read that to mean that the House was trying to lower benefits for those already retired, but on re-reading it, it doesn't seem to be clear.

Oh, yeah, if they lower benefits for those who will be retiring and not the retired, pretty much everyone who can manage it will be retiring as soon as possible.

Well, then they could save money by not filling those positions. Maybe that's the plan.

Phillbert 3 years, 7 months ago

There is a long-term deficit in KPERS. Kansas House Republicans' solution? An action that will make it even harder to close that deficit. Brilliant.

just_another_bozo_on_this_bus 3 years, 7 months ago

The rich say they need their tax breaks, so retirees must pay.

seriouscat 3 years, 7 months ago

HMMM. Grasshopper says remain leery of the US stock market...no more Glass Steagall, foxes guarding the hen house etc...

there's a reason for such a big push towards dumping billions of retirement dollars into the market...financial instruments are the lollypop and retirees are the babies. They ain't no where close to done robbin people yet.

Fred Whitehead Jr. 3 years, 7 months ago

I (was) retired last October. I have some (fortunately not all) my retirement funds in a company 401K. I still do not have access to my 401K funds. It seems there is (so I am told) some sort of federal law that you cannot receive 401K funds from an account that the employer still owes a distribution to. Distributions from this employer occur once a year and that has not occured yet and no one seems to be able to tell me when or if that distribution will occur. Result, a significant part of my 401K funds are locked up in this bureaucratic mess.

DO NOT go to the 401K system, you may find yourself in similar circumstances, retired, but unable to access your money. No one at this company bothered to explain these details to me.

jafs 3 years, 7 months ago

Sorry to hear that - it sounds terrible.

At the very least, you should have been informed of this before choosing to invest in it.

Brent Garner 3 years, 7 months ago

The problem with every defined benefit plan--KPERS is one--that I have seen is the unrealistic assumption made in the plan as to investment performance. In my accounting classes I have observed that most plans make an assumptive 8% average annual rate of return even though actual investment experience by that company does not meet that target. The result is a growing divergence between what is promised based on the 8% and the asset base to support which is driven by the actual rate of return. Perhaps if the assumption of 8% were modified to something more realistic the gap would eventually close. But, left as it is, the gap will inevitably continue to grow.

jafs 3 years, 7 months ago

Agreed.

I'd suggest a much more conservative projection of 4-5%, which can be gotten in relatively safe mutual funds invested in bonds.

But, the other problem with KPERS is that the state has been chronically failing to fund their end of it.

lawslady 3 years, 7 months ago

Correct jafs. The Legislature borrowed from KPERS funding levels, over the years, to pay for other things. The result is a mammoth unfunded liability. Meaning the state owes a bunch of people a bunch of money. Now compound that unfunded liability problem with the fact that there are now fewer employees (and will continue to be fewer employees as long as populations shrink) contributing into the system. The Ponzi scheme that is present in most social subsidy systems fails when the number of people contributing is less than the people taking out. Thus, the Legislature is faced with two issues; How to pay the promised money to the defined benefit (DB) participants in KPERS and how to keep more debt from piling up. Answer? The 401K plan (Defined Contribution = DC) whereby no promises are made for the distant future and the government workers risk the market failing, just like everyone else. Sounds good until you factor in the unfunded liability problem. For every worker you take out of the "regular" DB KPERS plan, and put into the DC style plan, you decrease the amount of $ going into the DB system. So you will find another way to pay for the unfunded liability already existing and owed.

Unless more cuts are made elsewhere, or more revenues come in from elsewhere, the state will need to go bankrupt to escape all the debts it currently owes. That won't help anyone. Unless of course you like living 1931 Depression style.

And meanwhile, the folks who are the MOST excited about a 401K style state retirement plan? The private companies who sell these products. They are circling like sharks in a pool full of blood. Thus,

coloradoan 3 years, 7 months ago

Yes, and these may just be the same folks that brought us the AIG/Lehman Brothers/mortgage CDOs debacle. Welcome to the financial version of "Terminator".

William Weissbeck 3 years, 7 months ago

First they eliminate the private sector pensions, then convince the workers that it's unfair that anyone else still has a pension using their tax dollars, then cut the public sector pensions. We've come full circle. At one time Henry Ford saw the benefit of paying his workers a living wage, not just a market wage. Companies used to provide pensions so that employees shared in the profits. Companies recognized a larger obligation to society and their workers that it made more sense to have forced large group savings. After all, corporations didn't want a socialist business model. Now they've cut their obligations, want to further cuts their tax obligations and just leave it to the workers to fend for themselves. It's every man to the life boats. By the way, in another story, the GOP wants to cut income taxes to zero. How exactly then does money magically appear to fund the KPERS shortage? Lewis Carroll couldn't have written better dialog for the Queen of Hearts.

verity 3 years, 7 months ago

"First they eliminate the private sector pensions, then convince the workers that it's unfair that anyone else still has a pension using their tax dollars, then cut the public sector pensions."

Exactly.

Set us against each other while they rob us blind.

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