Op-Ed: Zippo Lights the Way on Pension Reform

When you think of lighters, you probably think of Zippo. Over the past 85 years, the iconic Pennsylvania-based manufacturer has become one of the best-known brands in the world.

Recently, the company announced a move that shines light of a different kind: Zippo is transitioning from pension plans for its employees to 401(k)-style defined contribution plans. As company CFO Don Hall noted, defined contribution plans have more predictable costs while offering valuable retirement benefits.

For decades, private-sector companies have been making similar moves. Fewer than 5 percent of Fortune 500 companies retain a traditional pension, while 80 percent offer only a 401(k)-style plan, as of 2015.

 

Hall’s observation is hardly isolated. For decades, private-sector companies have been making similar moves. Fewer than 5 percent of Fortune 500 companies retain a traditional pension, while 80 percent offer only a 401(k)-style plan, as of 2015.

Gov. Wolf and lawmakers should take note.

Pennsylvania’s statewide pension crisis is no secret. The commonwealth’s two public pension systems—the Public School Employees’ Retirement System (PSERS) and the State Employees Retirement System (SERS) recently reported combined unfunded liabilities—or debt owed by taxpayers—of $62.2 billion. PSERS’ debt alone is an astounding $42.72 billion. 

Ten years ago, PSERS and SERS were 81 and 92 percent funded, respectively. Today, they have enough assets to cover just 60 percent of liabilities. In fact, the state’s public pension plans are so underfunded that Pennsylvania ranks near rock bottom in the country, according to a Tax Foundation analysis. Just four states have worse funding ratios.

Put bluntly, unless we act now, we risk being unable to keep the promises made to public workers. And everyone—public workers and all taxpayers alike—will suffer.

For proof, look no further than the Pittsburgh School District. At the beginning of 2015, the district’s share of the unfunded pension liability was an incredible $793 million. By year’s end, it had risen to more than $870 million—a 10 percent increase. This increase alone equals the average salary of more than 1,000 classroom teachers.

Other large Pennsylvania school districts have similar pension plights: Philadelphia’s 2016 unfunded liability was more than $3 billion, Central Bucks’ was $475 million, and Allentown’s share equaled $346 million.

Unless we act now, we risk being unable to keep the promises made to public workers. And everyone—public workers and all taxpayers alike—will suffer.

 

Families bear the brunt of paying off this debt through ever-rising property taxes.

From 2009 to 2015, school district revenue statewide grew by $3.9 billion to reach an all-time high of more than $27 billion. Yet 47 percent of this increase went to pension payments. This represents an increase of more than $578 per homeowner.

Without a doubt pension costs are the single biggest driver of property tax increases. In fact, over the last five years, 99 percent of school districts seeking exemptions to raise property taxes cited pension costs.

Our public pension system is broken. It puts public workers’ retirements at risk; it’s unsustainable for taxpayers; and it’s caused multiple downgrades of our state’s credit ratings.

Moreover, it does a disservice to new public employees. For example, three of four new public schoolteachers will never fully vest in today’s pension system. In contrast, 401(k)-style plans offer quick vesting and can be taken to new jobs. In today’s labor market—where workers change jobs an average of 10 times in their careers–portability is a must.

Fixing public pensions isn’t just common sense; it’s a necessity. We owe it to workers and retirees who are counting on the promises already made to them; we owe it to new teachers who want stability and options, and we owe it to working families who foot the bill.

The state Senate has discussed a proposal that shifts away from unsustainable defined benefit pension plans and includes a 401(k)-style component for new public employees. Similar legislation has been introduced in the state House, and voters support this type of reform

Sadly, for years the staunchest opponents of reform have been government union leaders. From claiming that no pension crisis exists to spreading myths about reform proposals, these union leaders endorse the status quo that saw our state’s pension crisis drive up property taxes and force schools to lay off teachers.

Without reform, the crisis will worsen. However, by acting now, we can fulfill our promise to public employees and build a sustainable pension system for workers and taxpayers alike.