Pennsylvania Can’t Afford to Ignore Pension Reform

Without reform, Pennsylvania cannot afford to keep their pension promises, according to a recent ALEC study, Unaccountable and Unaffordable 2016: Unfunded Public Pension Liabilities Near 5.6 Trillion. Split evenly among all Pennsylvanians, the estimated price tag for unfunded pension promises is now $16,527. Disconcertingly, Pennsylvania’s funded ratio is a mere 28.9 percent. Furthermore, the state ranks nearly dead last in the nation (41 out of 50) for total unfunded pension liabilities amounting to $211,586,194,586.

Unlike official state figures, Unaccountable and Unaffordable 2016 uses a more realistic valuation to determine Pennsylvania’s unfunded pension liabilities. An overly optimistic and unrealistically high rate of return, such as 7.50 percent for the Public Schools Employees Retirement System (PSERS) and the State Employees Retirement System (SERS), invites risk. The Pennsylvania Municipal Retirement System uses a slightly more realistic assumed rate of return of 5.5 percent. Most importantly, the Society of Actuaries’ Blue Ribbon Panel recommends using a risk-free rate. To uncover the extent of Pennsylvania’s true pension liabilities, the ALEC study uses a more prudent, risk-free rate of 2.344 percent, based on a hypothetical 15-year U.S. Treasury bond yield.

As Unaccountable and Unaffordable 2016 demonstrates, pension reform solutions in Pennsylvania must begin with calculating the true extent of unfunded liabilities. Unrealistically high assumed rates of return misrepresent how much money is needed to fund pension promises, today and in the future. Unfortunately, this will result in broken pension promises for retirees and financial burdens for hardworking taxpayers.

Pennsylvanians deserve better. Common sense solutions, such as creating a defined-contribution plan for new hires, and other solutions outlined in Keeping the Promise: State Solutions for Government Pension Reform, can help Pennsylvania keep its pension promises.