Today, the House State Government Committee passed a pension reform bill featuring an unproven “stacked hybrid” plan. This proposal falls short of the pension reform taxpayers needs to protect them from political manipulation and investment risk.
In the stacked hybrid system (for new hires only), the plan retains the current defined benefit plan on the first $50,000 of salary. Salary earned above $50,000 (or after 25 years) applies to a defined contribution plan. That is, the maximum defined benefit pension is $25,000.
The stacked hybrid is an unproven model; no state has ever implemented this type of plan. In contrast, ten states have side-by-side hybrid plans, as has the Federal Employees Retirement System.
All of the problems with defined benefit pensions—increasing benefits, deferring employer payments, and underperforming the assumed 7.5 percent rate of return—remain a risk to taxpayers. Additionally, the $50,000 salary cap could easily be raised (as Gov. Wolf has proposed) under public sector unions pressure for a Cost-of-Living adjustment, which would further minimize the defined contribution component.
This plan falls well short of the goals of a defined contribution plan. It represents a significant step backwards from the responsible pension reform plan passed by the legislature last year, and even a step back from the hybrid proposal considered late last year.
Moreover, this model provides poor plan design for workers. Public employees should be contributing more toward a defined contribution plan at the front end of their career to give their investments time to grow. Under a stacked hybrid, workers invest more in a defined contribution plan as they near retirement.
Research shows defined contribution plans provide stable and substantial retirements when workers invest over their career.
Lawmakers should continue to promote a defined contribution plan for new hires. This is the only way to remove politics from pensions.