Next fiscal year Pennsylvania school districts will pay $4.9 billion into PSERS, the state teachers’ pension fund.1 Less than one quarter of that amount will fund new benefits earned by working teachers. The majority will be used just to maintain PSERS’s $44.5 billion unfunded liability near its present level. Taxpayers are, in effect, making a giant interest payment.
This $4.9 billion payment, called the employer contribution requirement, is $99 million more than last year’s requirement, which was $343 million more than the prior year requirement. The amount of those two increases alone could have been used to provide nearly a quarter million households with $2,000 of property tax relief, to pay 6,800 teachers’ salaries or to build hundreds of miles of roads and rails. The volume of productive capital shoveled into the pension hole every year boggles the mind.
PSERS, the Public School Employee Retirement System, tried to put a positive spin on things when they announced the new contribution rates. Their press release of December 6 held out the hope that, if certain assumptions hold, future increases could be smaller than past increases. It also pointed out that the annual contribution has for several years exceeded the Actuarially Required Contribution (ARC), an estimated annual amount needed to amortize the unfunded liability in 24 years. PSERS is too optimistic. For one thing, back in 2010 when Act 120 mandated certain incremental reforms, their projection was that the employer contribution rate in fiscal 2021 would be 27% of payroll. It will in fact be 34.5%. Assurances that contribution requirements won’t grow from here should thus ring hollow.2
PSERS chronically underestimates its funding need because it assumes an unrealistically high 7.25% annual investment return, a target it has recently been missing. PSERS investment staff are surely trying their best, but given a low-risk mandate and low interest rates they are being asked for too much. PMRS, a smaller state pension fund, assumes a more realistic 5.25%. The PSERS board needs to level with the public by restating their unfunded liability in line with market reality. To chase high returns by taking on too much risk could make the situation even worse.
Once the true size of the funding hole is known, the legislature must move quickly to make the state’s pension promises sustainable: there is no scenario wherein the commonwealth fishes tens of billions of dollars out of the couch cushions. Defined-benefit pensions, which promise a set of fixed future payments regardless of market returns, are wholly unrealistic in an era where people live two and even three decades past retirement. The presently promised benefits cannot feasibly be paid.
In 2017 state politicians took the important step of modifying benefits for new PSERS members, but unless more is done the pension system will continue to be like Pacman, gobbling up everything in sight with an endless appetite. Ever-rising contribution increases draw money away from all other government services and drive up the property taxes that ironically harm older citizens most of all. The pension Pacman must be stopped.
1. The state reimburses the districts for at least half the payment, but this reimbursement is of course also taxpayer money.
2. For an excellent overview see “Point of Order: A Quick Analysis of the PSERS-announced FY2020-2021 Pension Employer Contribution Rate.” Capitolwire.com, December 9, 2019. Subscription required.