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May 25, 2016

The Wrong Formula for Pension Reform

There are times when we can almost repost an old blog verbatim, and this is one of those times. On May 17th, the House State Government Committee voted HB 1499 out of committee to the floor of the House; this is the third iteration of bad pension legislation.

As we noted last year:

“The Tobash plan was introduced last year [2014] as an amendment to HB 1353. At that time, it set up a ‘stacked’ retirement benefit system. The first $50,000 in state employee pay is eligible for a traditional pension; beyond that there is a 401(k) style plan. It is worth noting that the average state employee salary was $52,655 for 2014. In other words, the Tobash plan as introduced last year would have had impacted very few future employees. According to actuarial analysis done last year, 98.8% of the ‘savings’ projected under the Tobash plan is 15 years or farther into the future, which is a pretty big problem since SERS and PSERS are on course to be bankrupt in 15 years.”

The current version of the Tobash plan has all of the same problems and does not address the pension problem in any meaningful way. Instead, it is a reform in name only.

By their very nature defined benefit pension plans leave employees and taxpayers at the mercy of politicians. The current pension systems have a combined unfunded liability of more than $60 billion because elected officials are loath to make hard decisions when it comes to paying for the promises that they’ve made. HB 1499 does nothing to protect new employees or members of the current system. It creates an illusion of reform designed to avoid making government union bosses too angry and appease taxpayers who don’t have time to look into the legislation beyond the “pension reform” headline.

In their analysis of the legislation, the Commonwealth Foundation found further problems with the plan design:

“Moreover, this model provides poor plan design for workers. Public employees should be contributing more toward a defined contribution plan at the front end of their career to give their investments time to grow. Under a stacked hybrid, workers invest more in a defined contribution plan as they near retirement.

“Research shows defined contribution plans provide stable and substantial retirements when workers invest over their career.”

If Tobash’s “reform” is the best the General Assembly can muster, taxpayers are in for a double-dose of trouble. Senate Majority Leader, Jake Corman (R-Centre County) has indicated his willingness to trade a tax increase for an “overhaul” of the pension system. There is no need for a tax increase. The Legislature needs to prioritize spending. Furthermore, taxpayers should be livid that Corman would trade their hard earned money for reform that, at this point, will do little to nothing for solving the pension problem now or in the future.