Pennsylvania is on the brink of transformative pension reform. Under SB 1, new school teachers and state employees, including new lawmakers and judges, would automatically be enrolled in a side-by-side hybrid system. The hybrid consists of a defined benefit component (at half the benefit of current employees) and a defined contribution component, like a 401k.
New employees could also choose a defined contribution, 401k-only option. The proposal would also allow current employees to opt into the new system.
This bill doesn’t fully remove politics from pensions, 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. This pension crisis is only getting worse, and we can’t wait another decade to take action.
Here's five reasons lawmakers should act this week to advance SB1:
1. Protect taxpayers: SB 1 would be the largest shift in taxpayer risk of any state pension reform, according to an analysis from Pew Charitable Trust. Rosy projections and political manipulation of pensions has been the number one driver of property taxes. From 2009 to 2015, school district revenue statewide grew by $3.9 billion, yet 47% of this increase went to pension payments. This represents an increase of more than $578 per homeowner. In fact, over the last five years, 98% of school districts seeking exemptions to raise property taxes cited pension costs.
2. First step towards model reform: SB 1 establishes a 401k-style plan that could be built upon, allowing future reforms to move towards a true defined contribution plan. Under a defined contribution plan there is, by definition, no unfunded liability or debt.
3. Better plan for most teachers: Only 36% of new Pennsylvania teachers are projected to become vested in the pension system, which is designed to benefit those who stay 30 or more years, not for today's mobile workforce. Average workers today change jobs 10 times over their career. A defined contribution retirement would correct the bias against new and younger employees.
4. Protect public employees’ retirements: Detroit’s bankruptcy showed earned pension benefits can be reduced. Public employees should not have to worry if the state will make good on its pension funding promises.
5. Respond to voters: Polling shows 54 percent of voters supported placing new state employees in a 401k-style retirement plan. Pension reform isn't a partisan issue: 67% of Republicans, 51% of Independents and a plurality of Democrats support this reform.
Now $76 billion in debt (looking at market values), the state’s two pension systems hold enough assets to cover just 60 percent of liabilities. Unless action is taken soon, we risk being unable to keep the promises made to public workers.