In his budget address Governor Tom Corbett said, "Resolving our pension crisis will be the single most important thing we do for decades to come."
First, the pension issue is not a crisis! And second, the proposals Corbett is putting forth will not resolve this situation and will actually increase the cost to taxpayers over many decades.
The two state-wide pension plans, SERS for state employees and PSERS for public school employees are currently underfunded by $41 billion. These plans are funded by a combination of employee paycheck deductions, earnings on investments, and employer contributions (the state for SERS, and the state and local school districts for PSERS). The current "crisis" is the result of 10 years of underfunding by the employers and of poor investment returns in 2001-2002 and 2008-2009. While investment returns have rebounded, employer contributions have not been sufficient to meet the needs of the plans.
In 2010 the legislature enacted pension reform which committed the state and school districts to increasing their contributions and which will reduce the long-term cost to taxpayers by $19 billion over the next three decades. It also reduced the benefits and increased the contribution rates paid by employees.
Corbett's proposal to continue limiting employer contributions will continue the underfunding by employers for years to come and could push the unfunded liability to as much as $70 billion. This is the same thing that created the problem 10 years ago.
While limiting increases in employer contributions may provide some short-term savings, it will not reduce or eliminate the current $41 billion debt. That money has already been earned and is owed to current employees and retirees and will have to be paid some time.
Corbett's additional proposal to create a new 401(k)-style plan for new employees is not an answer to the problem either. While it might offer a small saving to employers, it will also result in increased administrative costs for managing the plan. California, Minnesota and Texas have investigated similar plans and determined that the change would increase their pension costs. Nebraska and West Virginia actually tried this approach, found it was more costly, and reverted back to their original plans.
Also, because the current plans rely on earnings from investing the money contributed by employees and employers, over time the amount of money which can be invested will decrease since new employees are no longer included. This will destabilize the current plans and will result in additional cost to taxpayers.
Governor Corbett should be proposing additional revenue sources to provide stable and adequate funding to public schools and to live up to the government's obligation to properly fund the existing retirement systems. More detailed information regarding the pension issue may be found at keystoneresearch.org/pensions.
David B. Kyle, New Columbia