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Urban Institute: PA state pension plans get poor rating

Debra Erdley
| Friday, Sept. 5, 2014, 12:36 p.m.

Pennsylvania's state employee pension plan is one of the three worst in the nation, a study by the Urban Institute claims.

The study, published on Thursday, said SERs, the state employee retirement system fund that serves about 120,000 retirees and 105,000 state workers, has an $18 billion shortfall and deficits that result in dramatic inequities in pension benefits.

The plan ties benefits to years of service. Researchers found 76 percent of all state-financed pension benefits go to the 25 percent of employees with the largest pensions, and the top 5 percent of recipients receive 22 percent of all benefits. Those who leave after five years, the minimum time to vest in the system, fared poorly.

Only Massachusetts and New Jersey scored worse than Pennsylvania in terms of covering new state employees, said economist Richard W. Johnson, a senior fellow with the Washington-based Urban Institute and lead author of the study.

The pension fund distributed $2.5 billion in benefits last year.

The group did not review Pennsylvania's much larger public school pension system. The two statewide pension funds have a combined deficit of $50 billion thanks to two market downturns and years of underfunding by the state.

Though economists have raised alarms about funding shortfalls and Moody's Investors Service cited them in downgrading Pennsylvania's bond rating this summer, Johnson said his group wanted to determine how well the state pension fund served members.

“Pensions have a purpose, and their purpose is to provide retirement security and to provide a compensation package that will attract and retain employees,” he said.

Johnson said alternative pension plans, including hybrid plans that combine elements of traditional pensions with 401(k)-style plans, could distribute benefits more equitably.

State Rep. Michael Tobash, R-Schuylkill County, said that was his goal when he began working on a proposal that became a hybrid-pension bill pending in Harrisburg.

“And I think a stacked hybrid model that provides a safety net for those at a lower level and lets those at the upper level take on some of the risk of a 401(k) gets at the root of the problem,” Tobash said.

Actuary Rick Dreyfuss, a senior fellow with the Commonwealth Foundation, a free market policy group, said many plans skew benefits toward those with the longest service. Pennsylvania's shortfalls in funding its public pension plans are a more critical issue, he said.

Debra Erdley is a Trib Total Media staff writer. Reach her at 412-320-7996 or derdley@tribweb.com.

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