August 5, 2016
Rep. Mike Turzai
Unfunded liability puts retirees and taxpayers at risk
Everyone involved in the debate over Pennsylvania’s public pension crisis needs to understand one, vital truth:
Pension reform isn’t simply about saving money. It’s about saving the pensions — benefits earned by thousands of public school teachers and state workers.
If we don’t find a way to reduce the expanding debt around our public pensions, no contract will overcome the unforgiving laws of mathematics. It’s this plain: without meaningful reform, both taxpayers and our retirees could be at risk.
Pennsylvania’s crisis has its roots in a succession of imprudent and poorly-timed decisions that stretch back decades. Our major error as a state was one shared by countless other government entities: We assumed that lavish returns on investments would never end.
Fifteen years, a major recession and countless changes in the financial markets, and we are headed toward a fiscal cliff. No succession of accounting maneuvers and fiscal sleights of hand can hide the fact that our two largest public pension systems have an unfunded liability — a projected debt — of $60 billion.
Maintaining the current fixed benefit plan, one that pays a set monthly benefit regardless of investment performance, would require massive tax increases and painful cuts in core state programs such as public safety and education.
For working Pennsylvanians already strapped by flat earnings and high taxes, paying more for less is not an option.
Nor should it be.
Many lawmakers, myself included, would support enrolling all new public school employees and government workers into 401(k) retirement plans.
Such defined contribution plans empower workers to manage their retirement investments and fit well with the increasing mobility of our modern workforce. Changing jobs? You take your pension investments with you.
The kind of personal control conferred by a 401(k) system allows employees to craft their own strategies for retirement, and frees them of the one-size-fits-all investment strategy that has left pensioners in other places, like Detroit, with pennies on the dollar for their hard work. When you control your pension savings, you aren’t at the mercy of impulsive budgetary quick fixes by politicians.
Defined contribution plans are also less costly to taxpayers.
The National Association of Pension Funds estimates that private-sector employers pay, on average, 6.5 percent of payroll toward employee retirement accounts. Public school districts in Pennsylvania lay out a whopping 30 percent of their payroll toward retirement benefits alone.
Public-sector unions have reflexively rejected any proposals that take even the most tentative steps away from the traditional defined benefit pension model. Yet, that very model is the one that moves us steadily toward a point of no return.
Members of both parties in the state House have passed legislation to address this crisis. We have developed a “stacked hybrid” bill that maintains elements of the current defined benefit system, while instituting the first 401(k) system in state history.
This compromise draws a line in the sand and says “no more” to the accrual of additional unfunded liabilities. Depending on how it’s structured, the stacked hybrid approach creates between $5 billion and $15 billion in savings and drives that money into real debt reduction.
Unlike other “reform” proposals, the stacked hybrid approach doesn’t include arbitrage gambles, funding reductions or gimmicky quick fixes. We fully meet our funding obligations to the retirement systems.
Most important, this plan is only applicable to future state and school district employees. The new plan would not affect benefits already earned by state workers or retirees in any way.
So far, the proposal has met resistance. Moving forward, common sense will be essential. There is no “perfect” solution to the pension crisis. But progress is possible.
Many of us would be supportive of a “side by side” defined contribution hybrid plan offered by members of the Senate. It does not offer the same level of savings but it clearly shifts risk from the taxpayers moving forward and would be a sizable step forward as well. We think a compromise approach could be reached soon.
The point is, we must do something and soon. We need to face the difficult reality that the traditional pension system is no longer sustainable. If we don’t act, the state’s credit ratings will continue to fall, and our pensions will risk insolvency.
With four months remaining in the current legislative session, the General Assembly still has the opportunity to recognize these realities and address our mounting debt in an innovative, fiscally responsible manner.
The stacked hybrid bill is our chance to steer away from the fiscal cliff, saving taxpayers from higher taxes and saving the pensions of thousands of public servants.
Rep. Mike Turzai, R-Marshall, is speaker of the Pennsylvania House of Representatives.