Pennsylvania's Pension Systems

Nov 6, 2018 Policy Memo Elizabeth Stelle

Pennsylvania’s total unfunded liability stands at nearly $70 billion and growing.

Lawmakers passed transformative pension reform in 2017 to get politics out of pensions. Now it is time tackle the pension liability.

Pennsylvania has a muncipial pension crisis, unfunded liabilities surged from $1 billion to nearly $8 billion in three years.

Pension Reform Act 5 Overview

Act 5 of 2017 reformed Pennsylvania’s pension systems by moving new employees from a defined-benefit plan to a hybrid defined-benefit and defined-contribution plan. This was a meaningful step away from defined-benefit plans, in which politics dictate benefits and taxpayers bear all the risk.
- January 1, 2019 – Most state employees hired on or after this date, including newly elected legislators, will have 45 days to choose between two hybrid plans or a straight defined-contribution plan.
- July 1, 2019 – All public-school employees will have 90 days to choose between the three plans.
- Current employees and legislators can opt into these plans within 90 days.

Other notable changes include:
- Shared risk and shared gain provisions, which increase employee contributions if investments underperform and reduce contributions if investments outperform.
- A cap on voluntary overtime as a component of final salary.
- Employees may make contributions above the minimum required by Act 5.

Remaining Challenges

Pennsylvania’s total unfunded liability stands at nearly $70 billion and growing.
- Public School Employees’ Retirement System’s liability totaled $49.4 billion in December 2017.
- State Employees’ Retirement System’s liability totaled $19.7 billion in June 2017.

Municipal pension plans also face unfunded liabilities. According to the Pennsylvania Municipal League, 66 of 67 counties have a severely underfunded pension plan. Total unfunded liabilities approached $8 billion in 2015, up from $1 billion in 2013.

The Way Forward

Creating a defined-contribution plan for all new employees would slow the accumulation of new debt and create a sustainable system with additional flexibility for state workers.
Lawmakers can tackle the unfunded liability in several ways:
- Increase pension contributions to pay off the unfunded liability over a 20-year period, as required in House Bill 778.
- Modify pension plan benefits not yet earned.
- Limit state spending growth and use revenue options—such as privatizing Pennsylvania’s liquor control system—to pay down the state’s unfunded liability.
Enacting municipal pension reforms, supported by a bi-partisan coalition of mayors, to increase transparency, and moving to cash balance or defined-contribution plans for new employees in distressed municipalities.