Pennsylvania Passes Bipartisan Pension Reform
Thanks to the dedication of numerous ALEC legislative leaders in Harrisburg, pension reform was enacted in Pennsylvania this week. The long-term financial risk to taxpayers of potentially being forced to bail out the state’s underfunded pension system is now substantially diminished.
The ALEC Center for State Fiscal Reform team joined dozens of legislators in Pennsylvania’s Capitol on Monday to witness Governor Tom Wolf, a Democrat, signing public sector pension reform into law. For years, policy experts from ALEC and other concerned organizations have worked closely with legislators to educate on the causes and extent of these unfunded liabilities. Going forward, Pennsylvania’s government workers will enjoy several “side by side” retirement options, including two defined benefit/contribution hybrids and a 401(k)-style plan. New workers can choose to participate solely in the defined contribution plan, rather than also contributing to the defined benefit plan. Current employees may elect to join one of these hybrids or the 401(k) plan, although current employees may also opt to remain in the existing defined benefit plan. This type of “side by side” model has been successfully implemented in Rhode Island, Tennessee, Virginia and Washington. The most beneficial part of the plan is this defined contribution component for every new state and school district employee by 2019.
This reform is timely. According to the Commonwealth Foundation, “From 2009 to 2015, school district revenue statewide grew by $3.9 billion, yet 47 percent of this increase went to pension payments.” Failure to address the looming crisis would have meant a combination of higher tax burdens and cuts in essential government services along with possible reneging on promises to public sector retirees.
Pennsylvania’s pension system is the 10th most underfunded in the nation, according to ALEC’s Unaccountable and Unaffordable 2016. Thanks to decades of bad decision making, the plans contain less than 29 cents in assets for $1 in obligations, using a risk-free rate of return. This amounts to more than $16,500 in unfunded liabilities for every resident in the state.
These reforms represent a strong start to addressing the daunting structural challenges of Pennsylvania’s public pension system. Employees, especially millennials, benefit from the portability of the 401k component, which empowers workers to make career and geographic decisions based on their own aspirations and preferences, rather than out of fear of losing retirement benefits. These personal retirement savings accumulate fully protected against erosion from future state government fiscal turmoil. Overall financial risk to the government is also mitigated with reforms, since the government must fully fund its share of the defined contribution plan each year; no further long-term liabilities can accrue from the typical annual underfunding.
If implemented properly, this approach could become a national model for reform. These measures will help Pennsylvania keep its promises to employees and retirees alike. Better still, they can serve as a platform for further improvements, such as expansion of the defined contribution component. By preserving retirement security for existing and future employees while putting in place a more fiscally sustainable benefit for new workers, both public employees and taxpayers win.
Megan DeGrafft assisted in the writing of this article.