A Risk Too Great: Bonds Alone Could Worsen Pension Crisis
Is your family ready to bend their budget to pay for Pennsylvania’s pension crisis? State pension costs are set to drive up the average family’s taxes by nearly $900 annually, but Senate Democrats claim to have a solution. This week they proposed borrowing $9 billion in pension obligation bonds to invest and drive down more than $47 billion in unfunded liabilities of the two state pension systems (PSERS for teachers and SERS for state workers).
Unfortunately, as the saying goes: If it sounds to good to be true, it probably is. Pension obligation bonds are a risky proposition. Issuing bonds without pension reforms, could put taxpayers on the hook for billions more.
Senator Pat Browne notes in Capitolwire [subscription required], “The history of pension obligations bonds is they represent a tremendous amount of risk. Across the country, when they have been used, there have been very mixed results.”
For example, under then-Mayor Rendell, Philadelphia issued $1.29 billion in pension bonds to balance the budget. But underfunding continued and pension liabilities grew higher still.
The experience of Philadelphia shows that pension obligation bonds alone are not the answer to Pennsylvania’s pension woes. And it’s because they fail remove politics from pensions. To achieve that, any pension reform plan should include a defined contribution feature to avoid future crises.
In a defined contribution plan, funds are deposited into an employee’s personal account, and it becomes impossible to increase benefits without paying for it. Underfunding requires telling workers that required deposits aren’t being made into their accounts. Such a transparent plan prevents political manipulation and wouldn’t take any benefits already earned away from retirees or current workers.
It’s commendable to see Senate Democrats acknowledging the pension crisis, but their proposed solution is a risk taxpayers can’t afford to take.