Phila. Inquirer Op-ed: Pension 'fix' will be costly

Authors: 
Stephen Herzenberg
Source: 
The Philadelphia Inquirer
Date: 
May 20, 2013

By Stephen Herzenberg
The Philadelphia Inquirer

In public policy, as in medicine, a guiding principle should be "first, do no harm." In other words, don't make the problem worse.

Unfortunately, Gov. Corbett's plan to radically restructure Pennsylvania's public pension system does serious harm to taxpayers, driving up the public cost of retirement benefits for years to come. It harms Pennsylvania's teachers, nurses, emergency responders, and other public servants by undermining their retirement benefits without saving a dime. And it harms efforts by Pennsylvania schools and other public employers to attract and retain high-quality employees.

Corbett and Budget Secretary Charles Zogby have sought to mobilize public opinion behind their plan by pointing to the billions in additional funds needed to pay for public pension benefits already promised.

Pennsylvania ran up its current pension tab during an unusual period - the most difficult for financial markets since the Depression. At the same time, three successive governors signed budgets that shortchanged pension plans.

Every paycheck, teachers and other public employees faithfully contributed to their pensions - about 7 percent of their salaries on average. But after two stock market crashes and lawmakers' diversion of needed funds to other priorities, robust employee contributions alone were not enough. Now the bill has come due.

Enter Corbett's proposal to end the state's current pension plans and shift new public employees to 401(k)-type retirement accounts. This plan will actually increase Pennsylvania's current pension debt and the cost of future benefits for state and school employers.

Here's what happens. Once the current pension plans are closed and new employees are enrolled in individual accounts, those left in the pension plans will age and retire as a group. Investment managers will have to shift to more conservative and lower-return investments to be able to pay out benefits as they come due.

When investment returns pay for less of existing pension commitments, taxpayers will have to pay more. The office of Pennsylvania Treasurer Rob McCord estimates that the governor's plan will increase the state's pension debt by $25 billion by 2046.

It's not just the transition to this new system that will be rocky: replacing pensions with individual 401(k)-like accounts will make the retirement benefits of future workers permanently more expensive.

State pension reforms enacted in 2010 cut new employee pensions, reducing overall costs to only 3 percent of employee salaries. The governor's plan will raise new employee retirement costs to 4 percent of payroll. Once individual accounts are fully phased in, annual costs will increase by $179 million.

State and local taxpayers are not the only ones left holding the bag. Public employees will end up with lower retirement benefits. That's because 401(k)-type accounts waste more money than pooled pensions on administration costs, financial management, and trading fees. And individual retirement accounts offer only half the retirement security of today's pensions for the same level of contributions, the National Institute on Retirement Security estimates.

So, Wall Street gets more money to manage individual accounts, while Main Street Pennsylvania gets lower retirement income. It's not hard to see why financial firms are lobbying heavily for the governor's plan.

By contrast, the pension reforms enacted in 2010 reduced future employee pension costs by more than 20 percent and put taxpayer protections into law, requiring employees to kick in more for their pensions in a future economic downturn.

The governor's pension plan would undo those reforms. It is not what the doctor ordered.

Stephen Herzenberg is an economist and the executive director of the Keystone Research Center.