Pattye Benson

Community Matters

PA Pension Crisis: A Vote to Change the Pension Laws is a Vote to Protect the Taxpayers

Unfunded pension liabilities are the dark cloud hanging over the state budget. Years of underfunded retirement promises to public employees has plunged the state into a financial black hole that is approaching $50 billion. The cost of doing nothing increases on a daily basis, and translates into higher property taxes, an inability to fund public education in the manner in which it deserves and painful cuts to critical government programs. The time is now for meaningful pension reform.

Facing huge shortfalls in the two public pension systems in Pennsylvania – PSERS (Public School Employees’ Retirement Systems) and SERS (State Employee Retirement System), State Rep. Warren Kampf (R-157) turned to a strategy that a lot of private companies adopted years ago – moving workers away from the guaranteed pension plans and toward 401(k)-type retirement savings plans. In 2013, he introduced two pension reform bills to move the public pension systems toward a defined benefit plan with defined contribution systems for all new hires while protecting the benefits of employees currently in the system.

Working with Mike Tobash (R-125) from Berks County, Kampf’s House Bill 1353 was amended to a hybrid pension reform plan that would not change benefits for current employees but would place new employees in a “stacked” pension system, including both a defined benefit and a defined contribution component. An overview of the proposed hybrid plan, including details on the defined benefit and defined contribution aspects, from Tobash website indicates:

  • Benefits of current employees would not change
  • All new state and public school employees would be subject to the same plan
  • The plan is a combined traditional, defined benefit plan and 401-K-type defined contribution investment plan
  • Bill would include provisions to allow absences for leaves of absence, furloughs, military service, disability, maternity leave, Family Medical Leave Act while remaining in the system
  • Employee contribution would be 6 percent
  • Defined benefit for first $50,000 of salary, indexed 1 percent annually
  • Defined benefit is fully earned after 25 years of service
  • Participants are vested after 10 years
  • Defined benefit cannot be collected prior to age 65 without penalty
  • No different classes of service
  • Employee contribution of 1 percent and employer contribution of .05 percent on all compensation up to $50,000
  • Employee contribution of 7 percent and employer contribution of 4 percent on all compensation more than $50,000
  • Employee contributions vest immediately and three-year vesting of employer contributions

Private employers decided years ago to terminate traditional pension plans in lieu of 401(k) plans and likewise, it is time for government to shift the pension plan’s risk to the worker. Some employees prefer the 401(K)-type retirement system because it gives more control over the retirement assets, including the ability to take the money with them when they change jobs.

Pennsylvania’s pension reform bill was on a roller coaster ride this last week. Gov. Corbett has been urging the legislature to pass pension reform, indicating that he would not pass the 2014-15 budget without its inclusion. But rather than approving HB 1353, the General Assembly voted 107-96 to send it to the House Human Services Committee. Sending it back ‘to committee’ could have meant the death knell for the bill. Fortunately, that was not the case and the House Human Service Committee voted to send HB 1353 to the full House for final consideration when the legislators reconvene in the fall after summer recess.

According to Tobash website, the plan is “estimated to save between $11 billion and $15 billion over a 30-year project period” but it is not without its naysayers. Some who oppose the proposed pension reform plan suggest that it will not solve the current underfunding problem and that it will reduce pension benefits of new employees. Although it is correct that under this plan, new employees will not have the same retirement benefits as those currently in the system, I would ask what is the alternative … do nothing and continue to feed the ballooning unfunded retirement black hole?

Doing nothing to affect the pension obligations is not acceptable, because it only allows a very bad situation to deteriorate even further. Taxpayers in Pennsylvania are on the hook for almost $50 billion in unfunded pension liability. The staggering pension debt should concern all of us — it threatens our state’s economy, our citizens and future generations. Now is the time for meaningful pension reform and lawmakers need to take action. A vote to change the pension laws is a vote to protect taxpayers – support House Bill 1353.

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  1. Let’s strip away the hyperbole from the discussion. Yes, there is currently a $50B unfunded liability, but even without any action by the legislature that unfunded liability shrinks to zero over the next 2 decades.
    I support the Tobash plan, but let’s realize it only reduces the unfunded liability from $50B to $39B. It does nothing to mitigate the onerous tax increases scheduled for the next 20 years. And the “relief” from the $11B savings will be realized when many of us will be dead.
    It should be mentioned that one taxpayer friendly way to deal with the unfunded liability is to reduce the multiplier back to 2% (from 2.5%) for current employees going forward. Doing this may be illegal as it’s uncertain how the PA Supreme Court would interpret “contractual obligations”. Unfortunately, this solutions will be untested because the legislature is unwilling to take the political risk.
    How do we deal with the problem of soaring pension payments at the local level? It’s not all that difficult. Pension payments are only a small segment (<15%) of employee total compensation. The school board is obligated to pay into the pension fund at the ever increasing rate, but the school board can decrease, freeze or modestly increase salaries to keep total compensation and tax increases in a reasonable range.
    How do we deal with the problem of soaring pension payments at the state level? This is difficult. On the expense side, the legislature can cut retirement benefits for future and/or current employees. On the revenue side, the legislature can either raise taxes or shift funds from one portion of the budget to another.

  2. Keitth
    School boards can NEGOTIATE to decrease, freeze or modestly increase compensation. They cannot just do it. Wage freezes and status quo have to be something every side understands. The treatment of health care benefits at the local level mirrors the state handling of retirement in many ways…no one has the power to change it…and no political will to challenge it. Defined contributions should replace defined benefits throughout the compensation.
    And watch the money that will pour in to oppose Kampf in his election for being so candid about the problem…PSEA holds all the power imo.

  3. The following is a letter to the editor in the Unionville Times by different R party chairs in Southeastern PA. Go to the Unionville Times to read it in it’s entirety.

    The complexities of pension reform, future pension
    obligation actuaries, and discussions about the unfunded liabilities facing the Public School Employees’ Retirement System and the State Employees’ Retirement System are enough to make the eyes of even seasoned policy wonks glaze over. So, the fact that pension reform is not a top priority for many Pennsylvania families is no surprise.

    However, the health of the pension system directly impacts education funding and property tax rates – two major topics of conversation around kitchen tables across the Commonwealth.

    Over the course of the past four years, Governor Corbett and the legislature have increased state funding for K-12 education from $8.9 billion to an all-time record-level of $10.5 billion, an 18 percent increase.

    Unfortunately, a huge chunk of that is being used to pay for rising pension costs for teachers and other school employees. Imagine how much more money would be going to our classrooms and benefitting our students if we could bring the state’s pension crisis under control.

    Left unchecked, the problem is only going to get worse. Pension obligations outweigh assets for Pennsylvania’s two state government employee pension systems by a combined $47 billion. Those unfunded pension obligations are projected to increase to more than $65 billion in the next five years. In the recently adopted $29.1 billion state budget, more than $1.6 billion of taxpayers’ money and other revenue went to pay pension obligations. In other words, $1 out of every $18 in state government spending goes to fund state pensions. State pension payments are projected to rise to more than $4.3 billion annually within the next three years if we do not act.

    As the pension crisis worsens, it means less funding is available for other priorities like health and human services, job training, classroom education, and open space preservation. The alternative — significant tax hikes on Pennsylvania families and employers – would stunt our economic recovery.

    Contact Us
    Mike McGann Unionville Times

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