Actuarial Studies Peg Taxpayer Cost of Governor’s Pension Plan at Over $40 Billion

Plan also forces taxpayers to pay for less cost-effective retirement plans, report finds
Date of Press Release: 
June 18, 2013

Media Conference Call: The call featured KRC Executive Director Stephen Herzenberg, Pennsylvania Treasurer Rob McCord, state Senator John Blake, and National Institute on Retirement Security Executive Director Diane Oakley. Download audio or listen in the player below.

HARRISBURG, PA (June 18, 2013) – Pennsylvania taxpayers will pay over $40 billion more for public employee retirement benefits in the coming decades under Governor Tom Corbett’s pension restructuring plan, according to new actuarial studies of the proposal.

Research also shows that switching school and state employees from defined benefit pension plans to 401(k)-type savings accounts, as the Governor proposes, costs over 50% more to provide the same level of retirement security. The Keystone Research Center has two new pension primers out today summarizing the actuarial studies and the research on 401(k) plans.

“These independent actuarial studies reinforce the point many have made since the Governor’s plans were first announced,” said Dr. Stephen Herzenberg, economist and executive director of the Keystone Research Center. “We cannot afford to dig a deeper pension hole, raise costs for taxpayers, and undermine retirement security. Advanced in the name fiscal restraint, the Governor’s proposal would leave taxpayers picking up a $42 billion tab.”

Last week, Pennsylvania’s Public School Employees’ Retirement System (PSERS) released a 30-year actuarial projection of the impact of the Governor’s proposal conducted by Buck Consulting. In May, the State Employees’ Retirement System (SERS) released a projection to the year 2050 of the impact of the Governor’s plan on the pension system for state workers, conducted by the Hay Group. 

Taken together, Buck and Hay project cost increases as a result of the Governor’s plan that total $50.8 billion. Most of these losses result from the following three impacts.

  1. Closing the state’s two defined-benefit pension plans to new employees would increase taxpayer costs by $40.1 billion due to lower investment returns as the pension plans wind down.
  2. The Governor’s proposed reductions in employer pension contributions over the next five years (the so-called “lowering of the collars”) would cost an estimated $3.9 billion.
  3. The taxpayer cost of retirement plans for future employees would increase by $2.3 billion—a savings of $4.9 billion for SERS would be exceeded by a $7.2 billion increase in costs for PSERS.

The Buck and Hay studies estimate the Governor’s plan will produce $28.7 billion in savings, most of it from reductions in future pension benefits earned by current employees. Even if these savings survived a state constitutional challenge (which is far from certain), the net costs of the Governor’s plan would be $22.1 billion, essentially all of them incurred by PSERS. (The Hay Group found that the cost and savings under the Governor’s plan offset each other.)  If the Governor’s pension cuts for current employees are not enacted or are ruled unconstitutional, his plan would cost $42 billion.

“It is more clear to me than ever that the Governor has not proposed a pension reform plan,” said Pennsylvania Treasurer Rob McCord. “He has proposed a scheme to allow him to close a hole in this year’s budget at both far higher costs for taxpayers and far lower benefits for retired workers down the road.“

“If you ask me, a $42 billion price tag should be reason enough for us in Harrisburg not to make another irresponsible decision about our pension system,” said Senator John Blake, Democratic Chair of the Senate Finance Committee.  “It’s time to set aside the Governor’s radical pension proposal and return to more incremental and evidence-based proposals for building on the pension savings achieved by the Pension Reform Act of 2010.”

The Keystone Research Center also released today another pension primer, Less Bang for the Pennsylvania Buck, summarizing research showing that 401(k)-type individual retirement accounts are much less cost-effective than Pennsylvania’s current pooled defined benefit pensions. Individual accounts have higher administrative and financial management costs than defined benefit pensions. Individual accounts also consistently deliver lower investment returns than professionally managed defined benefit pensions. As a Forbes magazine article reported this month, defined benefit “Pension Plans Beat 401(k) Savers Silly.” 

“The higher fees associated with individual accounts in 401(k)-type plans mean that Main Street Pennsylvania employees have less money in their accounts and retirees have significantly less money to get by on when they retire," said Diane Oakley, Executive Director of National Institute on Retirement Security. "Switching to 401(k) type accounts loses a very important cost advantage of Pennsylvania’s existing defined-benefit pensions."

Read the Pension Primers

Pension Primer #6
Less Bang for Pennsylvania’s Buck: Governor’s Pension Proposal Would Force Taxpayers (and Employees) to Foot the Bill for Retirement Plans with High Fees, Low Returns

Pension Primer #7
A $40 Billion Oversight: Actuarial Studies Document High Cost of Governor’s Pension Plan

Actuarial Studies

View Actuarial Cost/Advisory Notes for SERS and PSERS 

View Addendum to the PSERS Study

Pension Resource Page

You can find all seven pension primers and more resources at Keystone's Pension Issues Page.