In the Christmas classic Santa Claus is Comin’ to Town, the Winter Warlock despairs, “It is so difficult to make a change.” Kris Kringle disagrees, “It’s as easy as taking your first step. Put one foot in front of the other.”
Though it’s unlikely they were inspired by a holiday movie, it’s as if Pennsylvania lawmakers took Kringle’s advice to heart by passing pension reform in the 2017-18 legislative session after more than a decade of warnings. Act 5 of 2017 took a meaningful first step away from defined-benefit plans—in which politics dictate benefits and taxpayers bear all the risk—toward plans that include a 401(k)-style defined-contribution element.
Beginning next month, new employees and newly elected lawmakers will choose between a hybrid defined-benefit and defined-contribution plan or a purely defined-contribution plan.
As seen in the chart below, the 2017 reform is clearly just the first step on a long journey. While it doesn’t tackle the unfunded liability—almost $70 billion—it does limit the accumulation of additional debt. Slowing the growth of unfunded liabilities is significant considering the overall health of pension systems drives employer payments. School districts have been hit hard by ballooning payments for PSERS. Ten years ago, the taxpayer contribution for school district employees was just 5 percent of payroll. Today it is more than 33 percent.
“You mean it’s just my election to vote for a chance to be reformed? Woo-hoo!” the Winter Warlock exclaims once he understands a single step can lead to a transformation. As the new legislative session gets underway, lawmakers are in a similar position. They already took the first step; now they need to continue the transformation. Here’s how:
- Moving to a defined-contribution plan for all new employees to slow the accumulation of unfunded liabilities and create a sustainable system with additional flexibility for state workers.
- Tackling the unfunded liability through:
- Increasing pension contributions to pay off the unfunded liability over a 20-year period, as Rep. John McGinnis proposed in House Bill 778.
- Modifying pension plan benefits not yet earned.
- Limiting state spending growth and use revenue options—such as privatizing Pennsylvania’s liquor control system—to pay down the state’s unfunded liability.
- Enacting municipal pension reforms, supported by a bi-partisan coalition of mayors, to increase transparency, and moving to cash balance or defined-contribution plans for new employees in distressed municipalities.
Pew Charitable Trusts hailed Pennsylvania’s pension reform legislation as “historic.” Rather than resting on their laurels, lawmakers need to take the next step. As Kris Kringle advised the Warlock, “Don’t be the rule, be the exception. A good way to start is to stand.” It worked. The Warlock’s frozen heart melted, and he became Kris Kringle’s biggest supporter. If lawmakers take a stand for continued pension reform, we’ll see a similarly dramatic transformation in Pennsylvania.
Click the images below for our other 2017-18 session recap blogs.