PERC Pension Expert Concludes That Grell Plan Delivers Little Savings Except From Pension Bonds

Study Confirms Earlier KRC Analysis
Date of Press Release: 
July 30, 2014
Attachment: 

HARRISBURG, PA (June 30, 2014) Pennsylvania’s Public Employee Retirement Commission (PERC) today transmitted  to the legislature a report containing the first analysis of Rep. Glen Grell’s cash balance proposal by pension actuaries.  In the report, Cheiron, the PERC actuary, finds that the Grell cash balance pension fails to significantly reduce Pennsylvania’s pension debt while cutting benefits by half.

“Any pension plan redesign that fails to save money but reduces benefits should be a non-starter.  That goes for the cash balance proposal, as well as the Corbett-Tobash proposal,” said Dr. Stephen Herzenberg, Keystone Research Center economist and Executive Director.

The Cheiron report on the Grell plan concludes the following (see especially p. 5):

  • Most of the cost savings projected from the Grell three-pronged proposal result from $9 billion in pension bonds (referred to in Cheiron’s report as the "special fund").
  • Savings from lower benefits are offset by costs from lower investment returns that Cheiron anticipates would result from the cash balance plan.[i] Long term, lower investment returns mean that taxpayers and employees will need to make larger contributions to achieve any given level of benefits.
  • Benefits for teachers and other education employees will be "approximately half of the benefits for Act 120 members.” (The actuary for the state employee pension plan did not estimate the impact of the cash balance plan on retirement benefits.[ii])

The Grell proposal will likely lead to an additional hidden cost: wage and salary increases needed to retain quality employees once pensions have been cut.  This cost was not modelled by the actuaries.

Instead of receiving a guaranteed pension, employees in cash balance plans receive a guaranteed interest rate on employee and employer contributions. Upon retirement, the amount of money – or “cash balance” – amassed on behalf of an employee can be converted into a fixed annual pension payment or “annuity.” The Grell proposal analyzed in the PERC report requires 7% employee contributions and 4% or 5% employer contributions, and guarantees employees a 4% return on investment plus half of all pension plan returns above 5% (starting in 2018).

Dr. Herzenberg added that KRC is open to Rep. Grell’s idea of using bonds to buy down pension debt. He also expressed openness to exploring Grell’s third prong, voluntary pension reductions for existing employees, if it was part of a compromise that includes revenues sufficient to solve Pennsylvania’s pension debt and make up for past state underfunding.

This is the second time that actuarial studies have confirmed an earlier KRC analysis of a major pension proposal. The first was in February 2013, when KRC pointed out in the transition costs of Governor Corbett’s proposal to switch to 401(k)-style retirement accounts for new employees. Transition costs of about $40 billion were confirmed by actuaries in late May and June 2013.[iii]

“It’s time to go back to the drawing board on pensions,” said Herzenberg. “We look forward to a more collaborative policy process open to all creative ideas, and a fact-based evaluation of each.” In early June 2014, KRC put its own ideas on the Table at the end of its ninth pension primer, available online at www.keystoneresearch.org/pensions

 You can find all of KRC’s pension briefs and other resources on pensions at http://keystoneresearch.org/issues-guides/pensions

The Keystone Research Center is a nonprofit, nonpartisan research organization that promotes a more prosperous and equitable Pennsylvania economy. Learn more: www.keystoneresearch.org.




[i] While the pension system actuaries did not explicitly model this reduction in investment earnings, Cheiron did. When Cheiron uses a "blended" return, between 7.5% and the 4% guarantee, the savings over and above pension bond savings equal $2.2 billion and $0.4 billion for PSERS and SERS respectively. This $2.6 billion is on a cash flow basis and would likely be below one billion measured in “present value” terms (dollars in hand today).

[ii] Using a prior actuarial study that did include estimates of state-employee benefit cuts under a (prior) cash balance proposal, KRC found the Grell proposal would cut benefits for state employees as well as for education employees. See Stephen Herzenberg, Cash Balance Plan Could Hurt Public Employees and Taxpayers, Keystone Research Center, October 1, 2013, online at http://keystoneresearch.org/publications/research/cash-balance-pension-plan-could-hurt-public-employees-and-taxpayers. The Grell proposal analyzed by KRC provided somewhat higher benefits than the one analyzed in the PERC actuarial note today. For that reason and because KRC’s method for estimating benefit cuts was conservative, KRC found somewhat lower benefit cuts than the actuary for the Pennsylvania School Employees’ Retirement System (PSERS) in one of the studies released as part of the PERC note.

[iii] KRC’s analysis of a third pension proposal, the Corbett-Tobash plan, was released after, and based on, the actuarial studies of that plan.