Pennsylvania’s policymakers are currently debating changes to pensions for public school employees and state workers. Governor Tom Corbett has proposed a pension plan that digs a deeper pension hole for taxpayers, weakens employee retirement funds, and raises the cost of future employee benefits.
How We Got Here
As the Corbett administration’s pension report notes, the ingredients of the current pension challenges facing Pennsylvania include “short sighted” political decisions that led to “nearly a decade of underfunding by state governments and local school districts,” and “investment returns that failed to meet expectations” as a result of one of the stock market’s “most volatile periods in recorded history." As a result, Pennsylvania's public pension plans have $47 billion in unfunded future costs.
What Has Been Done So Far
The General Assembly enacted the Pension Reform Act in 2010, curbing rising pension costs. The Act’s reforms included:
- Reducing pension benefits for new employees by over 20%;
- Increasing the retirement age to 65 for new employees, extending the period for employees’ benefits to vest from 5 to 10 years, and eliminating the lump-sum withdrawal of their contributions at retirement; and
- Implementing an innovative “shared risk” provision for new employees that increases employee contributions if actual investment returns fall below assumed returns.
The Pension Reform Act lowered the cost to the state and schools of pension plans for new employees to 3% of salaries. It would be difficult for any alternative pension plan for new employees to beat this low cost.
Key Facts About the Governor's Proposal
Governor Corbett’s pension proposal, unveiled in February, would undo much of the progress made with the Pension Reform Act of 2010 and represents a step backwards.
The plan lowers state contributions to pensions for the next five years, reduces benefits earned by current workers in the future, and enrolls future employees in a 401(k)-type defined contribution plan, among other changes.
Below are key facts about the Governor’s proposal. More detailed Pension Primers can be found here.
- The Governor’s proposal would increase Pennsylvania’s pension debt (or “unfunded liability”).
- The Governor’s proposed reductions in state contributions to pensions would increase Pennsylvania’s pension debt by $5 billion by 2019.
- Closing the state’s current pension plans to new workers also increases the pension debt—as those left in the plans grow older and retire, fund managers will invest in less risky and more liquid assets, lowering returns and requiring more contributions to meet pension obligations.
- The Pennsylvania Treasurer’s office estimates that the Governor’s plan increases pension debt by $25 billion by 2046.
- The Governor’s pension proposal would increase the cost of pensions for new employees above the low levels (3% of salaries) achieved in the 2010 Pension Reform Act. Once the Governor’s new 401(k)-type plan is fully phased in, it will cost taxpayers an estimated $179 million more each year than current pensions, including $112 million paid by local school districts.
- The Governor’s proposal does not make the responsible contributions to pensions required by the 2010 Pension Reform Act. Diverting pension contributions repeats the short-sighted political decisions that helped create the current pension debt in the first place.
- The Governor’s proposal to cut current workers’ pensions risks court reversal for violation of a constitutionally protected contract. It leaves the state uncertain of pension costs for years and then with potentially higher pension debt.
- Teachers, nurses, emergency responders, and other public employees contribute heavily to their own pensions and earn lower salaries than comparable private-sector workers. School and state employees have contributed 7%, on average, every single paycheck to their own pensions. Even with good benefits, public workers earn lower wages plus benefits than equivalent private-sector workers.
- The Pension Reform Act of 2010 reduced pensions for future employees by more than 20% and protects taxpayers by requiring even higher employee pension contributions if financial markets plummet.
- Pennsylvania’s pension debt should be kept in perspective. Pension debt is a small share of total state funding over the decades the state has to pay it off. In addition, the vast majority of Pennsylvanians lose each year an amount close to the current pension debt because the richest 1% garner a bigger piece of the economic pie today than in the 1970s.
Pension Primers #1 and #2
Governor’s Pension Plan Will Cost the State and Taxpayers More
Read a press release on Pension Primers #1 and #2 released on February 26, 2013.
Pension Primer #3
2010 Pension Reform Achieved Significant Long-Term Savings
Read a press release on Pension Primer #3 released March 5, 2013.
Pension Primer #4
Governor’s Proposal Delays Public Pension Payments, Repeating Short-Sighted Practices That Drove Up Pension Debt
Read a press release on Pension Primer #4 released April 16, 2013