Make honest pension reform a priority in Pa.

Posted by By at 21 February, at 16 : 27 PM Print

By Richard C. Dreyfuss

As Gov. Corbett’s fiscal year 2013-14 state budget proposal is finalized, the familiar challenge of balancing finite resources against ever-increasing spending requests begins. This year, expect debates over special initiatives ranging from liquor privatization to transportation funding.

But there is one recurring and unresolved challenge that only seems to become worse with each passing year – public pensions costs, specifically those of two statewide plans, the Public School Employees’ Retirement System (PSERS) and the State Employees’ Retirement System (SERS). It is a good sign that the governor and other elected officials seem interested in making sustainable pension reform a policy priority in 2013.

The combined deficits of PSERS and SERS are estimated to be more than $44 billion. This equates to more than $3,400 per Pennsylvania resident. However, the actual deficits are probably much higher, as most observers think the current 7.5 percent annual investment return expectation is unduly optimistic.

Despite prior attempts to achieve pension reform, the pension funding deficits only seem to continue to increase. Add in other obligations at the local, state, and federal levels, and the fiscal path is unsustainable.

Deficits threaten to displace other competing budgetary expenditures. There is no issue more fundamental to the future of this commonwealth than finally getting pension reform right.

However, no one has really identified what comprehensive and sustainable reform will look like. Not surprisingly, we may be at risk of repeating history, given the legislation enacted as recently as 2010, which reduced benefits for new hires while continuing to underfund our system for several years.

So how is a taxpayer to determine whether true reforms are achieved?

One need look no further than what is happening within Pennsylvania’s private sector. Just ask your relatives or your neighbors about their 401(k) plans and the reductions in their retiree medical programs. The trends are clear. Reforms adopted by the majority of these private-sector companies ensure their budgeted costs are affordable and predictable while also being properly funded.

To finally achieve comprehensive and sustainable pension reform in Pennsylvania, we need to adopt both plan-design reforms and funding reforms. There is much talk about the former and little talk about the latter. Funding reforms in simple terms mean contributing what the actuaries recommend, rather than a predetermined amount convenient for policymakers. The goal should be to adhere to a basic standard: Benefits are funded as they are earned.

A recent Pew Study of the States based on fiscal year 2010 data indicated Pennsylvania contributed only 29 percent of actuarially recommended contributions. While more recent years may show some improvement, contributions remain well short of this important standard associated with comprehensive reform. Chronic underfunding only adds to future deficits, while creating the illusion of reform.

Unfortunately, those who complain the loudest about past underfunding are often the same individuals who supported past legislation, most recently in 2010, that further shortchanged these same plans in the name of reform. This simply allowed pension contributions to be redirected to other favored expenditures.

Some policymakers have discussed the possibility of reducing unearned benefits for current employees. While such a strategy could provide some overall reduction in total plan liabilities, it should not be the basis for failing to contribute the actuarially recommended contributions going forward. That would only continue to shortchange the pension plans.

While none of the responsibility here lies with the individual public employees, who made their required pension contributions, it is also not the fault of the individual taxpayers who paid their required taxes.

If nothing is done, this burden will fall to future generations of Pennsylvanians who will be forced to pay ever higher taxes to a government that, because of its pension obligations, will be capable of doing less and less. Achieving comprehensive pension reform is essential to provide the necessary incentive for individuals to live, work, and invest in Pennsylvania.

Read more: Fixing the Public Sector Pension Problem.

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