House Pension ‘Reform’ Overpromises, Underdelivers

Senate Should Enact True Reform That Protects Pennsylvanians

June 14, 2016, HARRISBURG, Pa.—The state House today passed a pension bill that promises reform but delivers little savings and keeps the state steaming toward a fiscal iceberg. While this “stacked hybrid” plan is projected to save $5 billion over 30 years, the savings in present value are just $1 billion on a $63 billion debt.

Meanwhile, the state’s unfunded pension liability has climbed 730 percent in the last decade and stands at $63.2 billion, or nearly $5,000 for every man, woman, and child in the state.

“Lawmakers are right to tackle our broken pension system, but unfortunately, the plan passed today is a Band-Aid where reconstructive surgery is needed,” commented Nathan Benefield, vice president of policy for the Commonwealth Foundation. “$1 billion in projected, but not guaranteed, savings barely puts a dent in $63 billion in liabilities.”  

Unfortunately, misdirected optimism has been the mark of Pennsylvania’s pension system for far too long. Just last week, SERS reported an investment return of a mere 0.7 percent during the first quarter of 2016—a far cry from the 7.5 percent assumed yearly return. And PSERS just revised its return assumption downward from 7.5 to 7.25 percent, meaning unfunded liabilities will automatically increase by as much as $2.5 billion.

The “stacked hybrid” plan in SB 1071 would keep the current defined benefit pension for new employees, up to the first $50,000 of annual income. A defined contribution plan, similar to a 401(k), would apply to income over $50,000 or income earned after 25 years. Each year, this income threshold would increase by 3 percent.

“This plan does not address our pension crisis or adequately protect taxpayers,” Benefield continued. “It’s no coincidence stacked hybrid plans have not been tried in any other state. Instead of putting our pension system on a path to sustainability, this legislation tempts Pennsylvanians to settle for less than real reform and does nothing to prevent our pension crisis from persisting and worsening.

“We hope the state Senate addresses this bill’s shortcomings and proposes true reform with stronger defined contribution components that reduce the risk to Pennsylvanians. We’ve already seen what ten years of inaction can do, driving unfunded liabilities from $7.6 billion to more than $63 billion. We can’t afford another ten years of quasi-reform that keeps politics in pensions and guarantees taxpayers will be footing skyrocketing pension costs for decades to come.”  

Nathan Benefield and other Commonwealth Foundation experts are available for comment. Please contact Gina Diorio at 862-703-6670 or gld@commonwealthfoundation.org to schedule an interview.

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