This week, Senate Majority Whip Pat Browne, Sen. Mike Brubaker, Senate Appropriations Chair Jake Corman, and Senate Majority Leader Dominic Pileggi announced plans to introduce pension reform legislation. The new plan would put all new participants in SERS, which includes state workers and state legislators, and PSERS, which includes public school and other covered employees, hired after Dec 1, 2012 into a defined contribution plan, like a 401(k).
Defined contribution plans protect taxpayers and benefit participants because they can provide competitive, predictable and current benefits—meaning liabilities cannot be deferred onto future generations. The big flaw with the current system, a defined benefit pension, is not so much the generosity of the plan, but the mixture of pensions and politics.
When investments do well, lawmakers have political incentives to enhance benefits (even retroactively) for active members and retirees. However, when investments lag, taxpayers are forced to pay more, and lawmakers again have perverse incentives to kick the can down the road and push the costs onto future generations.
This was indeed a major part of the “reforms” passed in 2003 and 2010 which delayed “unaffordable” payments, only to require higher payments in the future. Such deferral strategies received the full support of a number of groups, including organized labor and many elected officials, since this freed up money for other uses and everyone knew these plans would eventually have to be made whole.
The day of reckoning has arrived, as taxpayer contributions for state and school employees’ pensions are expected to rise from $1.7 billion to $6.1 billion over the next five years. That increase comes to an additional $1,000 per Pennsylvania household in a combination of state and local taxes.
To be sure, the proposed Senate reforms would not erase the massive liabilities already accrued. Rather, they would prevent future manipulation, fiscal catastrophes and continuation of generational theft.
While government union bosses claim 401(k)-style retirement plans—which are standard in the private sector—are an insult to employees, defined contribution plans can indeed be just as favorable as traditional plans, and have many additional benefits for workers. For more on this, see our pension resources page.
While more can be done to address the pension and retiree healthcare crisis, including reforming local government pension plans and looking at future benefits for current employees, the Senate’s proposal represents an important start to addressing the pension crisis.
Here are the Commonwealth Foundation’s Five Principles for Pension Reform:
- Establish a Unified Defined Contribution plan for new state and local government workers, school employees, judges, and legislators.
- Prohibit pension obligation bonds or other post-employment benefit (OPEB) bonds on a statewide basis.
- Mandate pension and OPEB liability management reforms for current and any newly created liabilities.
- Consider modifying unearned pension benefits to the extent legal and feasible.
- Consider funding reforms only after prior steps are achieved.