Pennsylvania’s pension crisis is about to hit Pennsylvania homeowners and taxpayers, and the results won’t be pretty.
The state’s two pension systems – for state government workers (SERS) and public school employees (PSERS) – are, together, more than $40 billion in debt. It’s a shortfall that taxpayers must cover, amounting to an average $1,000 increase in contributions per household by 2017. In the Philadelphia region alone, property taxes are expected to rise between $240 and $630 a year as a result.
Citizens have been aware of the looming crisis for years, with one concerned parent in Levittown aptly calling it an “impending pension tsunami” back in 2011 during teacher-contract negotiations. Two years later, many policymakers in Harrisburg continue to ignore the crisis, and now the tidal wave is both larger and closer.
Beyond higher taxes, the ballooning pension costs are also threatening to gobble up funds for education, public safety, transportation, and other programs. The pension tsunami will likely force more teacher layoffs – on the heels of 6,000 in the last two years already – and cuts to arts and athletic programs in our schools. That’s why Gov. Corbett’s proposal to reform the system is so necessary.
How did things get so bad? The problem started more than a decade ago, in 2001. Facing a flush stock market and a fully funded system, legislators raised benefits for state and school workers by 25 percent, hiked their own benefits by 50 percent, and created a cost-of-living increase for retired workers a year later.
Together, the increases created a $10 billion hole in our pension systems, which only deepened through stock market crashes and a lingering recession. To make matters worse, lawmakers passed legislation touted as reform that delayed paying off our pension obligations.
Sensible reform is preferable to tax hikes or service cuts, and the governor agrees. His solution includes moving the state’s pensions to a 401(k) model, also called a “defined contribution” plan. Under this system, the state would annually put a set amount of money into employees’ retirement plans, while workers would continue to contribute a portion of their salaries to their pensions.
The “defined contribution” system would get politics out of pensions. Our current system encourages lawmakers to grant lavish benefits in good years and avoid paying in bad years. The 401(k) model, on the other hand, requires that the government deliver on its payment promises every year – making it difficult for the government to promise things it can’t afford. The costs would be current, affordable, and predictable – none of which is true under the status quo. And workers would also enjoy the control and transparency of individual retirement accounts. No politician could raid the accounts for pet projects.
Moreover, 401(k) plans offer more convenience for employees. Younger workers, especially, would benefit from the ability to take a 401(k) with them as they change jobs, instead of forfeiting retirement savings to advance their career. Older adults could pass any remaining 401(k) funds on to their children. Compare that with the current “defined benefit” system, in which pension payouts end when retirees die, even if they paid in more than they collected.
Our teachers and state workers deserve better than empty promises. And Pennsylvania taxpayers deserve to be protected from the looming crisis. By shifting the state’s pension system to a 401(k) model, lawmakers will shield both workers and taxpayers from the pension tsunami.
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Priya Abraham is a Senior Policy Analyst at the Commonwealth Foundation, Pennsylvania’s free-market think tank.