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The Pension Crisis Will Trigger Another Tax Hike
The 2016-17 budget is in the books with a $650 million tax increase. That's a significant increase—but it could pale in comparison to future tax hikes if pension reform continues to fall by the wayside.
Meanwhile, there's a notion gaining traction that we don't need pension reform because our public pension crisis is at a climax. After all, the yearly spikes in pension contributions will moderate beginning in fiscal year 2018.
Nothing could be further from the truth.
Recent reports from the state's two pension systems (PSERS & SERS) show the crisis is far from over. In April, SERS reported an approximately $350 million jump in the system's unfunded liability, swelling to $18.79 billion in 2015. But according to their actuary, the unfunded liability is closer to $19.45 billion—a roughly $1 billion jump.
SERS assumes a 7.5 percent rate of return for investments, but the actual rate of return was only 0.4 percent in 2015. This year isn't looking any better. SERS reported a 0.7 percent investment return for the first quarter of 2016.
In June, PSERS reduced their assumed rate of return from 7.5 percent to 7.25 percent starting in fiscal year 2017. These changes will add to the unfunded liability by about $2 billion.
In the past 3 months alone, we've added at least $3 billion to the already enormous $63 billion pension liability. Now imagine the impact of a recession or another reduction in assumed investment returns.
It's clear our pension system's liabilities are still growing at a rapid pace with no protection for taxpayers. The only way to truly end the pension crisis is to change the fundamental structure of these plans from the antiquated defined benefit plan to a modern defined contribution plan.
Like the budget, small adjustments may ease tensions in the short-term, but systematic reforms are required to change our future. Right now all signs point to higher taxes for Pennsylvanians.