State Pension Reform This Week?

Pension reform talks are in full swing as state lawmakers finish up their fall session. The latest pension proposal offers a side-by-side hybrid system for new employees, including new lawmakers and judges, beginning January 2018. The hybrid consists of a defined benefit component (at half the benefit of current employees) and a defined contribution component, like a 401k.

Alternatively, new employees could choose a defined contribution only option.

This represents a significant improvement over Governor Wolf's proposed stacked hybrid plan. And it's an improvement on the side-by-side hybrid approved by the State Senate in December, which was linked to a $1.8 billion tax increase.

Here's a rough breakdown of the major components:

Component Proposed Side-by-Side Hybrid December Proposed Side-by-Side Hybrid
DB Employee Contribution 4.5% or 5.5% 4% or 5% 4% 3%
Benefit Accrual Rate 1% or 1.25% of final salary 1% or 1.25% of final salary 1% of final salary 1% of final salary
DC Employee Contribution 3% 3.5% 3.5% 3.25%
DC Employer Contribution 2% 2% 2.5% 2.5%
Optional DC Only Employee Contribution  7.5% 7.5%    
Optional DC Only Employer Contribution 2% 3.5%    

The proposal also closes loopholes that inflate pensions. Those reforms include altering the final average salary calculation to prevent the use of excessive overtime at the end of one's career to increase pension payments and ensuring the lump sum payment option is revenue neutral. The latter reform applies to current and future employees.

This doesn't get pensions out of politics, but any reform that reduces the influence of politics on the pension system—while creating a model for further improvement—represents a step in the right direction.

The next step is tackling the monstrous $60-plus billion pension liability driving tax hikes.