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Commonwealth Foundation


Rendell Pension 'Reform': Generational Theft

by Richard C. Dreyfuss
 

Gov. Rendell and the Democrat-controlled House are trying to redefine pension "reform" by further deferring the scheduled taxpayers' contributions to the state's largest government pension plans - the Public School Employees Retirement System (PSERS) and State Employees Retirement System (SERS). The cost of this reform with interest is a breathtaking $52 billion.

In the interim, by further underfunding these pension systems, this politically convenient diversion from spending taxpayer money enables willing policymakers to further grow government budgets under the ruse of "saving" money and "investing" elsewhere.

Can you imagine not paying your mortgage in order to grow your family's budget expenditures elsewhere? Moreover, this financial manipulation is anchored on an 8% annual return on investments for the foreseeable future. These concerns are echoed by the Pennsylvania Employee Retirement Commission (PERC), which wrote in their May 27, 2010 actuarial note:

...[I]t must be noted that the temporary collared contribution rates proposed in the bill do not follow generally accepted actuarial standards of practice. The short-term effect of the bill would be to defer the payment of actuarially required contributions to both PSERS and SERS, resulting in the underfunding of both retirement systems. This underfunding will permit the continued growth of the Systems' unfunded liabilities resulting in a steady decline in the funded ratios of both PSERS and SERS.

In other words, the proposed reforms would transfer today's unaffordable costs to future generations of taxpayers - our children and our children's children.
The specific proposal (House Bill 2497), which passed the House Appropriations Committee on June 7, 2010, would increase the taxpayers' annual contribution rate over 10 years rather than three years, as required by current law. In addition, PSERS's investment asset performance would be averaged over 10 years instead of five, in an effort to "hide" poor returns on investments.

Instead of trying to redefine reform, Pennsylvania should immediately establish a statewide defined-contribution (DC) plan for all new government employees. Rather than further burdening our public pension systems, any new teacher, legislator, judge or state, county or municipal worker should be placed in a system similar to those for some state and local workers in Alaska, the District of Columbia, and Michigan.

Then we must put spending and debt controls on the current defined-benefit plans that are prone to financial and political manipulation. Public pensions are too frequently used as political capital. When a pension surplus accrues, it is used to improve benefits for unionized employees. When a pension fund runs deficits, taxpayers are blamed for underfunding them. Politicians get a high political rate of return from government employees for maintaining or improving benefits, but they receive little return for actually funding them.

Therefore, in order to remove politics from retirement benefits, we must:

Prohibit such public pension features as Deferred Retirement Option Plans (DROPs), which allow workers to double-dip by collecting a pension while still working for full compensation.

Prohibit any benefit increases if the result would cause the funded ratio to fall below 90%.

Prohibit pension obligation bonds, as they put even more taxpayer money at risk without changing the fundamental problems.

Prohibit amortization periods that extend beyond the average retirement age of members in the plan.

Extend vesting periods so that individuals who spend a short time working for government are no longer able to earn a lifetime pension.

Unfortunately, Gov. Rendell's pension proposal fails to implement any of these necessary reforms. And it is why organized labor groups like the PSEA - while simultaneously blaming the taxpayers for "underfunding" PSERS and SERS - are supportive of the underfunding of pensions in House Bill 2497. They know that diverting money from pensions for spending elsewhere in the budget today (i.e., public education) will eventually have to be paid tomorrow.

Our children will already be forced to pay for our underfunded public pension plans. But Gov. Rendell's $52 billion pension "reform" represents a doubling-down on this generational theft.


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Richard C. Dreyfuss, an actuary and pension expert, is a Senior Fellow at the Commonwealth Foundation (www.CommonwealthFoundation.org), a public policy research and educational institute in Harrisburg, PA.


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