Defined benefit pensions aren’t the problem
In 2010, the legislature and governor faced rapidly rising employer pension contribution rates often referred to as the rate spike. In response, an overwhelmingly bipartisan majority of the House and Senate Approved Act 120 which was widely viewed as a responsible pension reform solution that served as a roadmap to dealing with the crisis. Act 120 included shared sacrifice by reducing benefits for employees by $33 billion, increasing employee contributions, the retirement age to 65, the vesting period from 5 to 10 years and prohibiting early lump-sum withdrawals. It also reduced the cost of benefits for the employer by 60 percent and pays down the accrued pension debt caused largely by employer deferrals, benefit enhancements and investment losses from the economic downturns in 2001, 2003, and 2008. Employees who entered the system since Act 120 took effect are 100 percent funded and Commonwealth’s cost is just three percent of payroll. The problem moving forward is not the revised defined benefit pension that new state employees are receiving, but the unfunded liabilities as a result of underfunding from the past.
When the increased debt payments prescribed in Act 120 started coming due in 2013, another crisis was declared. In order to address this pension “crisis”, we need to: pay our debt obligation and respect workers constitutional rights; both prescribed in Act 120.
In February 2001, state and local governments began to underfund their portion of pension payments, despite workers making required contributions, thus the state and school districts amassed a large unfunded liability. Pennsylvania now owes a combined $53.3 billion in unfunded liability for its SERS and PSERS systems. No proposal, Republican or Democratic, significantly relieves the state from its obligation; it’s the bill we continue putting off paying that we now need to pay. Multiple court rulings reinforce the state is liable for past pension promises. Attempts to cut existing benefits will only result in costly court battles and further delays in addressing the real issues.
Attempting to switch from the revised defined benefit pension to a 401k style plan may satisfy ideological objectives of some, but does not address the accrued unfunded liability. In fact, actuarial studies show it would worsen the problem.
Closing the defined benefit plan and switching to a 401k style plan would generate a whole new realm of problems. It wouldn’t make the $53.3 billion disappear. Some estimates put the closure cost for both defined benefit plans at $44.2 billion and a new 401K program would carry additional operating costs to taxpayers of as much as $44 billion over and above the $53 billion over the next 30 years. The state would be paying to run two plans.
A recent Keystone Report shows Alaska, Michigan and West Virginia made the mistake of doing away with defined benefit plans and came to regret it. Alaska’s unfunded liability debt doubled to 12.4 billion by 2014 and the legislature is currently working to revert to a defined benefit pension plan. Michigan’s plan was overfunded when it closed in 1997 yet the funded status dropped to approximately 60 percent by 2012 with $6.2 billion in unfunded liabilities. West Virginia closed the teacher retirement system to new employees in 1991; however, their funded status continued to decline and retirement insecurity increased for teachers with the new accounts. The state returned to its defined benefit pension plan by 2008. These experiences show moving from a defined benefit plan to a defined contribution plan could prove detrimental to retirement security and worsen the current fiscal problems.
Gov. Wolf proposed pension reform that delivers a plan for making payments and providing adequate school funding. Part of the pension funding crisis comes from the Corbett administration and Republican-led legislature's failure to adequately fund schools, forcing school districts to use pension resources to fund daily operations. Gov. Wolf also proposes restoring local school district funding to help them meet their pension obligations.
“Pension reform” proponents are preying on the complicated nature of the issue, attempting to manipulate the public into thinking the only solution is to revoke defined benefits for hardworking public employees. Their proposals do little or nothing different to address the pension debt. This attempt threatens a pension system that supports 843,000 Pennsylvanians, one in every six households, and serves as a stabilizing force in Pennsylvania’s economy. The average SERS and PSERS retiree receives between $22,000 and $27,000 annually in retirement. This modest benefit guarantees that, unlike some retirees from the private sector whose 401k’s tanked during the recent economic recessions, workers will not be an additional burden to government safety-net programs of Medicaid, welfare benefits, food stamps and other anti-poverty programs.
Act 120 is already working to prevent future unfunded liability situations.
We need to pay our debts and let Act 120 work.