Pennsylvania Aims to Reform Government Pensions

By Fara Klein and Nick Oswald

Pennsylvania legislators are gearing up to tackle one of the largest financial problems facing states today: unfunded pension liabilities. The traditional defined-benefit model for government pensions enables lawmakers to promise generous pension benefits without saving sufficient funds to pay for them. A lack of funding and the fact that benefits are guaranteed—regardless of investment performance—has led to significantly underfunded pension systems across the country. Both the House and the Senate in Pennsylvania have recently advanced legislation to reform the state’s pension system. Unfortunately, these efforts have been stalled, but Gov. Tom Corbett will likely pursue pension reform again this fall.

A recent study revealed that the average public employee’s pension plan in the United States is only 41 percent funded—bringing total state and local unfunded liabilities to an estimated $4.6 trillion. Gov. Tom Corbett has long sought pension reform for the Keystone State, given Pennsylvania’s estimated unfunded liability of $100 billion (an average of $19,965 per household in pension debt.) The issue needs to be resolved soon because Pennsylvania’s pension debt increases at a rate of $17 million per day.

Despite these dismal estimates, opponents of pension reform claim that even though reforms may produce significant cost savings, those savings would be outweighed by costs associated with moving to a new system. As examined in Chapter one of Rich States, Poor States, this is commonly referred to as the “transition cost argument.” As an Arnold Foundation study explains, “Moving new workers to a new system does not affect the funded level of past benefit accruals, nor does it affect the debt service payments employers must make to pay off any accrued debt. The pension debt is a bill that is owed to public workers for past service, and this debt must be paid regardless of the go-forward retirement savings system.”

As Pennsylvania works towards pro-growth pension reform, states such as Rhode Island are ahead of the game and have successfully taken steps to reduce unfunded liabilities. In order to ensure the sustainability of their retirement funds, the Ocean State has adopted a 401(k)-style hybrid that has allowed them to reduce their liabilities by $3 billion. In 1997, Michigan also made the choice to move from a defined-benefit plan to a defined-contribution 401(k)-style hybrid plan. This move allowed them to save $167 million in pension costs and reduce unfunded liabilities from $2.3 to $4.3 billon. Utah is another state that has stepped into the pension reform spotlight. With the leadership of State Senator Dan Liljenquist, the legislature adopted a new 401(k)-style hybrid as well. All three of these states have used the same model of a 401(k) style, defined contribution plan, which will ensure retiree benefits are protected from faulty accounting practices.

Pennsylvania has room to enhance its competitiveness as the state ranks 34th in ALEC’s annual Rich States, Poor States report. However, without proper reforms to Pennsylvania’s retirement system, state workers and taxpayers will remain at risk. Considering the many viable alternatives to the present system that are available, continuing along the current path hardly seems to be a risk worth taking.

In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure…

+ Cronyism In Depth