Pension Reform in Pennsylvania – An Update

A new report by the Commonwealth Foundation shows the desperate need for public pension reform in Pennsylvania and how a shift to defined contribution (DC) plans is a viable solution. The state currently faces more than $50 billion in public pension debt, thanks to large unfunded liabilities of the two major state pension systems, the State Employees’ Retirement System (SERS) and the Public School Employees’ System (PSERS). The two systems are only 60% funded, with funding ratios having steadily declined for 12 years. Full funding of the state’s public pensions in 30 years requires an estimated $7.5 billion increase in annual contribution, equivalent to $1,550 per household. In five years, pension costs as a share of General Fund expenditures will almost double (from 5% to 9.8%), crowding out important government services.

Moving from the current defined benefit (DB) system into a DC one, as recommended by Governor Tom Corbett in 2013, could save Pennsylvania nearly $12 billion in employer contribution costs and nearly $40 billion in plan costs over the next 30 years. It would also bring about major benefits for both employees and employers:

• Portability: The average worker changes jobs more than ten times in his or her career, and DC plans, unlike DB ones, allow for transferring of accumulated pension funds across employers.
• No unfunded liability: DC plans by definition are always fully funded since all the funds promised are paid up front.
• Choices for workers:Employees have their own individual accounts and can pursue their own investment strategies.
• Potentially higher returns:DC plans consistently invested in a diversified portfolio can accumulate more wealth for retirement than DB plans.
• Cost predictability:Employer contribution levels are known in advance and do not change much from year to year.