May 29, 2017
Bucks County Courier Times
The state Senate recently took the first steps toward passing a significant overhaul of Pennsylvania’s troubled public pension systems. Far from entering unchartered waters, Senate Bill 1’s critical change, a 401(k)-style pension component, has been tested and approved in the private sector and in other states.
For decades, private-sector companies have been transitioning from traditional pension plans for employees to defined contribution plans like 401(k)s. In fact, fewer than 5 percent of Fortune 500 companies retain a traditional pension, while more than 80 percent offer a 401(k)-style plan exclusively.
Recently, Zippo — the iconic Pennsylvania-based lighter manufacturer — also announced this transition. As company CFO Don Hall noted, defined contribution plans have more predictable costs while offering valuable retirement benefits.
Pennsylvania’s statewide pension crisis illustrates the need for a similar retirement sea change in the public sector.
The commonwealth’s two pension systems — the Public School Employees’ Retirement System (PSERS) and the State Employees’ Retirement System (SERS) — recently reported combined unfunded liabilities, or debt owed by taxpayers, of $62.2 billion. That’s about $5,000 for every man, woman, and child in Pennsylvania.
Ten years ago, PSERS and SERS were 81 and 92 percent funded, respectively. Today, they have enough assets to cover just 60 percent of liabilities. Only four states have worse funding ratios, according the Tax Foundation.
Put bluntly, unless we act now, we risk being unable to keep the promises made to public workers. And everyone — public workers and all taxpayers alike — will suffer.
Pennsylvania’s largest school districts show the consequences of inaction.
At the beginning of 2015, Pittsburgh School District’s share of pension debt was $793 million. By year’s end, it had risen to more than $870 million — a 10 percent increase. This increase alone equals the average salary of more than 1,000 classroom teachers.
Other large districts have similar pension plights: Philadelphia’s 2016 unfunded liability was more than $3 billion, Central Bucks’ was $475 million, and Allentown’s share equaled $346 million. Each liability exceeds the school district’s annual budget.
Families bear the brunt of paying this debt through ever-rising property taxes.
From 2010 to 2016, school district revenue statewide grew by $3.9 billion to an all-time high of more than $28 billion. Yet, 60 percent of this increase — equal to the salary of 35,000 teachers — went to pension payments instead of curriculum and programs.
Without a doubt, pension costs are the single biggest driver of property tax increases. In fact, over the last five years, 99 percent of school districts seeking exceptions to raise property taxes cited pension costs.
Our public pension system puts public workers’ retirements at risk; it’s unsustainable for taxpayers; and it has caused multiple downgrades of our state’s credit ratings.
Moreover, it does a disservice to new public employees.
For example, just 36 percent of public schoolteachers will stay at their jobs long enough — 10 years — to fully vest in today’s pension system, according to state projections reported by Education Next.
In contrast, 401(k)-style plans offer quick vesting and can be taken to new jobs. In today’s labor market — where workers change jobs an average of 10 times in their careers — portability is essential.
Fixing public pensions isn’t just common sense; it’s a necessity. We owe it to workers and retirees who are counting on the promises already made to them; we owe it to new teachers who want stability and options, and we owe it to working families who foot the bill.
SB 1 finally shifts away from unsustainable traditional pension plans by offering an optional 401(k) plan to new hires and existing employees, or new hires will be enrolled in a hybrid plan which includes a traditional pension alongside a 401(k) component.
Similar legislation has been introduced in the state House, and voters overwhelmingly support this type of reform.
Sadly, for years the staunchest opponents of reform have been government union leaders who have claimed no pension crisis exists and spread myths about reform proposals.
To prevent the crisis from worsening and to chart a sustainable course for public workers and taxpayers alike, the General Assembly and Gov. Wolf must ignore the naysayers and take their cues from the private sector by enacting 401(k)-style pension reform.
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Nathan Benefield is vice president and COO of the Commonwealth Foundation, Pennsylvania’s free market think tank.