Not Paying Pension Bills Hurts our Grandkids

This commentary first appeared in the Patriot News.

In the midst of the annual state budget process, most are focused on daily updates and the corresponding reactions from affected special interest groups often heard in the main rotunda of the state Capitol. Media reports analyze the impact of the ongoing negotiations to determine who will likely be the ultimate “winners and losers.”

One group that is perennially relegated to the “losers” category is the next generations of taxpayers should they for whatever counterintuitive reason someday choose to live, work or invest in Pennsylvania. The fact is that those involved in last year’s pension legislation affecting PSERS and SERS chose to defer actuarially appropriate pension contributions.

Politicians last year passed their version of pension reform by deferring existing unfunded liabilities, making them even more unaffordable. The situation was so severe that they felt compelled to include a legislative provision that effectively capped contributions for several years despite repeated and significant concerns raised by independent actuaries that such a move would only further shortchange already underfunded plans.

It is a subterfuge for any policymaker to tout they are contributing 100 percent of the “actuarially recommended contribution,” because this simply describes the 2010 underfunding mandate scheduled to continue through 2014. Those defending such manipulative policies are the same individuals the next generation should be most concerned about.

Even under the most optimistic scenarios, we will need to (1) make increasingly unsustainable future “actuarially recommended contributions” for the next 30 years while achieving (2) the 8 percent assumed annual return-on-investments during this period while (3) enacting no new benefit enhancements including retiree COLAs or early retirement incentives. The strong likelihood is none of these three conditions will be met.

In fact, this 30-year trifecta reform strategy lasted only about three months, as this March the PSERS Board lowered its 8 percent long-term investment assumption to 7.5 percent (along with other assumption changes), which is expected to add $3.5 billion to the unfunded liability estimated as of July 1. Separately, a March 2011 Wilshire national investment study concluded that none of the 126 U.S. public pension plans studied (including PSERS and SERS) are expected to earn more than 6.5 percent annually through the next 10 years.

Within this political maneuvering and demagoguery, an immovable and unanswered question remains: Why should someone’s current pension cost be legislatively assigned to our grandchildren?

Many point to the history of benefit improvements, low asset returns and underfunding as contributing factors to this deficit. However, those who complain loudest about the prior underfunding are often the strongest advocates of further underfunding to ensure their special interests are funded in the near-term.

Ironically, Act 40 of 2003 called for increased contributions beginning in 2012, when this proved unaffordable, the 2010 reform further deferred contributions. The fact is public sector defined benefit plans and politics don’t mix. How many times must we learn this lesson?

The remedy should be to exit these defined benefit plans while increasing near-term funding. But if 2010 is a precursor of future reform, the next generation will be better off with a new direction using the private sector as a benchmark rather than these partial reforms.

Add to this the separate retiree medical plans that also have unfunded liabilities in the billions that are not well-acknowledged and even less well-funded. Once we have solved all these problems, we can begin considering reforms to the other 2,000+ pension plans in the state.

To address this pension crisis, in addition to a defined contribution plan, we need to increase near-term annual contributions in the billions of dollars and to do so without new taxes. This is where the true budget debate should be occurring instead of policymakers creating new ways to spend an illusory surplus while pension and retiree medical plan deficits continue to increase.

Meanwhile, the debate over the 2011 “winners and losers” continues as our grandchildren will someday wonder how could they have made such decisions?

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Richard C. Dreyfuss is a senior fellow at The Commonwealth Foundation.