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As $50B pension debt weighs on Pennsylvania, other states have embraced retirement overhauls

Debra Erdley
| Saturday, July 26, 2014, 8:42 p.m.

The future of public pensions has become a bone of contention in this year's Pennsylvania gubernatorial race, and public employees fear they're the ones who will get bitten.

Republican Gov. Tom Corbett, who is trailing in the polls, insists underfunded state and school public employee retirement plans are causing hardships for taxpayers. He wants the Legislature to reduce the size of the lifetime pension guarantee for future hires and supplement it with a 401(k)-style benefit that shifts some of the risk to workers.

Corbett's Democratic opponent, Tom Wolf, claims the governor hasn't looked hard enough for new sources of revenue to fund state retirement systems.

Like most states, Pennsylvania offers lifetime pensions to employees. The plans require employees to contribute a portion of their pay — 6.25 percent for most state employees and 7.5 percent for most school employees. State and local school district taxes pay the employer contribution. Those payments, coupled with fund investment gains, furnish the pool for retiree payments.

Years of benefit increases, investment losses and state underfunding have left the plans that cover about 830,000 workers and retirees about $50 billion short of what's needed to pay benefits. That triggered steep spikes in pension costs that have fueled increases in property taxes, tuition at public universities and even turnpike tolls.

Corbett conceded that proposed changes to the system won't fill that $50 billion hole or provide short-term relief, but he said lawmakers need to think long-term and adopt a hybrid plan that would marry a capped lifetime benefit to a 401(k)-style plan.

Wolf campaign spokesman Jeffrey Sheridan said, “Tom believes that we need to let Act 120 (a 2010 law that reduced benefits for new hires) work. Additionally, he will work to create innovative solutions and explore new funding mechanisms, such as pension obligation bonds, that are fiscally responsible and fair and beneficial to taxpayers and workers.”

State and school workers insist the plans, which provide an average annual income of about $25,000 to more than 320,000 retirees, are sustainable and the 2010 law that kept the lifetime pensions but lowered benefits for new employees ultimately will cure the spikes in taxpayer contributions.

“Basically, the position of our members is that they've kept their end of the bargain. They've paid paycheck after paycheck their entire careers while the commonwealth has not met its minimum payments. That's the biggest source that has created Pennsylvania's pension debt, and it's a debt that has to be paid,” said Pennsylvania State Education Association spokesman Wythe Keever.

Some taxpayers say it is too much.

“It's an impossible dream. Sooner or later, you run out of other people's money, and the people it hurts worst are retirees,” said Dick Swaney, a retired metallurgical engineer who teaches math and science at a private high school near his home in Springdale. “If my school tax doubles, I could handle it. But when I think about some of my neighbors who are retired steelworkers and coal miners, they're barely making it. They'd have to sell their homes or lose them.”

According to the Employee Benefit Research Institute, 39 percent of private sector workers have employer-sponsored retirement plans, compared to about 71.5 percent in the public sector.

Private sector, lifetime pension plans gave way to 401(k) plans beginning about 20 years ago, when the Financial Accounting Standards Board required employers to acknowledge and record their pension obligations. Recently, the Government Accounting Standards Board (GASB) adopted similar standards for public pension reporting.

“GASB is in the process of going exactly where the private sector did, with what will probably be the same result,” said Steve Blakely of the Employee Benefit Research Institute.

Only Alaska and Michigan have shifted new hires into 401(k)-style programs, but nearly a dozen states have crafted hybrid programs featuring smaller lifetime pension plans along with a 401(k)-style plan, and some states, such as Florida, are giving new employees the option of going entirely into a 401(k)-style plan.

Economist Richard Johnson, director of the Washington-based Urban Institute's Program on Retirement Policy, recently published a report on Rhode Island's hybrid retirement plan. He said many workers there likely will do better under the new plan.

“These defined-benefit plans work very well if you're going to stay for 30-35 years, but they require a pretty large employee contribution, and they don't work very well for the shorter-term worker,” Johnson said.

A study published by the Center for Retirement Research at Boston College concluded that providing a “meaningful” lifetime pension for public workers while allowing those higher on the pay scale to pay into a defined contribution would “ensure a more equitable sharing of risk and also prevent headlines generated by the occasional inflated public pension benefit.”

Debra Erdley is a staff writer for Trib Total Media. She can be reached at 412-320-7996.

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