Steps to real pension reform
Gov. Corbett and legislative leaders are bickering over pension reform. It’s a disagreement of little consequence, because the reform they want is of little consequence.
The only reform in play right now is a hybrid plan for certain classes of new public sector employees.
This Rube Goldberg contraption promises $11 to 15 billion of savings over the next 30 to 35 years. However, the interest on the unfunded accrued liabilities (UAL) of our state pensions could total more than $150 billion over that time.
According to actuarial analysis, 98.8 percent of the impact of the proposed hybrid plan will occur beyond 15 years from now.
How much faith can we have this will happen?
Ten years ago, legislators established a policy of underfunding the pensions with the promise they would pay 100 percent of the actuarial required contribution (ARC) by fiscal year 2014 and every year after that.
That promise was reversed four years ago with Act 120, and a policy of underfunding the pensions continues.
If legislators can’t stick to a plan for 10 years or even five years, how can we expect them to stick to a plan for 30 years?
In fiscal year 2014, about $1.5 billion or 5 percent of the general fund was paid into the pension plans of SERS and PSERS.
This was about half of what should have been paid to fully cover the ARC.
Twenty years from now, because of increased payouts to retirees and a shrinking and possibly bankrupt pension fund, we can expect that ratio to increase to 40 percent or more of the general fund. And a proportionate increase will occur for school districts.
Real pension reform requires effectively addressing two problems. First, how to pay off the UAL in less than 20 years, which is the time until retirement for the average public sector employee.
Some estimates have the UAL at $50 billion, but according to Moody’s methodology, that number is in excess of $100 billion. Moody’s and Standard and Poor’s are two of the credit rating agencies preparing to downgrade Pennsylvania’s bonds again because of the growing pension debt and chronic underfunding.
In fiscal year 2015, about $2.8 billion will be paid into the pensions by the state and school districts. But $5 billion should be paid this year in order to eliminate the UAL within 20 years.
If we can’t afford the $5 billion figure now, how will we afford a figure triple or quadruple that in 20 years?
The second problem we have to address is how to create a pension plan going forward that is affordable and predictable.
If there is one clear lesson from the past in both the public and private sectors, it is that defined benefit (DB) plans are neither predictable nor affordable, in the public sector they are particularly susceptible to misbehavior by politicians, who get short-term advantage by enhancing benefits and not paying for them, while sticking taxpayers with their long-term costs.
The only proper course of action is to provide public sector employees with an affordable defined contribution (DC) plan, which requires that benefits are fully paid as they are earned.
So step two is creating an affordable DC plan for new employees and others as the law permits. But step one is the harder lift – more money to cover the UAL and sooner rather than later.
As our leaders in Harrisburg try to find the votes for a plan of negligible consequence, those clanking sounds you hear are the crumbling of the Commonwealth’s credit while the proverbial can is being kicked down the road.
John D McGinnis, R-Blair, is the State Representative of the 79th District.