Latest Plan Could Grow the Pension Iceberg
On the heels of bipartisan wine reform, the PA House is reportedly considering a pension reform plan that could actually increase pension costs.
Known as a stacked-hybrid plan, the current bill retains the current defined benefit plan on first $50,000 of salary or 25 years of service. Salary earned above $50,000 would apply to a defined contribution plan.
However, Democrats have floated an amendment to increase the defined benefit limit to $70,000 in salary and index the threshold to the national average wage, further minimizing the critical defined contribution component.
In their actuarial analysis, PERC estimates the Democratic-favored amendment would cost more than the current pension plans.
Even if this amendment fails, it would be relatively easy to revisit in future years, allowing another way to politicize pension benefits.
Lower than expected investment returns could also wipe out any savings under a stacked-hybrid plan. This week SERS reported disappointing first quarter returns of 0.7 percent, a far cry from the assumed yearly return rate of 7.5 percent. These poor investment returns mean taxpayers shoulder the burden of additional costs.
As noted in Rick Dreyfuss's latest policy memo, the failure to enact pension reform over the last decade led to a $60 billion unfunded pension liability—which families will be paying for generations.
Both the pension reform bill vetoed by Governor Wolf and the plan negotiated in December, as part of the infamous framework budget, are somewhat better alternatives to this stacked-hybrid plan.
Passing pension reform under Governor Wolf will require compromise. But the closer we can move to a defined contribution plan—a proven model that provides substantial retirements and cannot be underfunded—the better taxpayers and state workers will be protected.