Employees Lose Under PA's Public Pension Systems

Most workers are shortchanged by Pennsylvania’s public employee pension programs, according to two recent studies.

The Urban Institute gives Pennsylvania’s State Employees’ Retirement System (SERS) an “F” grade, ranking it third worst in the nation—better than only Massachusetts and New Jersey.

The September 2014 report says:.

The plan scores poorly because it is inadequately funded, it penalizes work at older ages by reducing lifetime benefits for older employees, and it provides few retirement benefits to short-term employees”…

One in five employees with at least five years of completed service lose money by participating in the plan because pensions they earn are worth less than their required plan contributions.

SERS gives 76 percent of the benefits to 25 percent of employees, according to the Urban Institute.

A similar disparity is found in a Bellweather Education Partners study of the nation’s pension funds for public school teachers, including the state’s Public School Employees’ Retirement System (PSERS).

Generous benefits for long-term teachers are partly paid at the expense of those who leave teaching earlier or move from place to place within the profession, according to the study, Friends without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security.

Less than 25 percent of Pennsylvania’s teachers ever become vested in the pension system, compared to a national median of approximately 45 percent, says Bellweather.

In contrast, defined contribution plans like the 401(k), offer many features better for younger workers. In addition to portability and better benefits for short-term employees, our recent pension study outlines several reason why transitioning to a defined contribution retirement system is an improvement for many employees.

These include:

Ownership. Workers with higher risk preferences can pursue their own investment strategies without restrictions.
Potentially higher returns. A growing body of evidence suggests that a lifetime of defined contribution retirement investments produce higher returns than individuals cashing out of a defined benefit program.
Security. By definition, defined contribution plans are fully funded. All of the funds promised to an employee are paid up front and become the employee’s property. There is no risk of reduced benefits from municipal bankruptcy as in the case of Detroit.

The primary obstacle to a more equitable retirement system are teacher unions notes the Bellweather study, saying “the teachers who remain in the system long enough to maximize their benefits—an ever shrinking group—are the most organized politically, via teachers unions and other stakeholder groups.”

Unfortunately, government unions’ refusal to acknowledge the need for pension reform will hurt workers for years to come. Pension reform is essential to not only protecting taxpayers from enormous debt and rising property taxes, but to give workers a higher quality retirement system where benefits are better distributed.