One peril of pension reform

The United States government is now at its borrowing limit. In order to continue to make interest payments on debt, the federal government is considering some short-run borrowing from federal government workers' pensions. Many federal workers, after hearing about this plan, may decide to rush into retirement earlier than anticipated:

About 550,000 full-time career federal government employees and U.S. Postal Service workers could hang it up and move on at any time because they are currently eligible to retire, according to government statistics obtained Thursday. The eligible workers represent about a quarter of the 2.4 million permanent full-time employees collecting government or postal paychecks.

It illustrates one of the problems of a government-run pension system where outflows are determined in part by the decisions of thousands of individual participants: you can't make disruptive changes in the system without potentially affecting short-run outflows. That means the program itself is subject to a constraint that may not be built into actuarial models.

The actuarial models used in relation to Kentucky Retirement Systems, thankfully, typically assume that when a worker retires that they take full advantage of just about every benefit offered and will maximize their pension and then retire. That is, they make fairly conservative assumptions about the retirement timing decision of the average worker.

But in Kentucky, like the federal government, workers can retire early and thus begin collecting pensions (albeit smaller pensions) at a younger age. A decision en masse by Kentucky's government workers to take early retirement would devastate KRS's finances in the short run and could obligate taxpayers (through the General Assembly and county governments) to far larger pensions payments in the short run. That's why I argue that any reform of the pension system should not affect the decision environment for current workers who participate in KRS's programs.