‘Frankenpension’ Should Frighten Taxpayers
A House and Senate conference committee is taking another shot at pension reform. In keeping with the Halloween spirit, they have resurrected their hybrid pension proposal one more time in an attempt to achieve "pension reform" by decree.
Unfortunately, this over-engineered proposal with many exempted employee groups will likely offer insignificant savings when measured in today’s dollars and by itself will do nothing to address the ever-increasing unfunded liability. The "everything will be fine" 30-year scenario touted by some, should be tempered by others who reference the risk of plan insolvency occurring over the next 15 to 20 years.
In fact, CAP continues to seek a single example in the US private-sector where such a similar plan design arrangement exists.
As we’ve noted on multiple occasions, the hybrid plan does not offer any meaningful protection for taxpayers particularly since the defined-benefit plan can always be retroactively increased. The House has been trying to sell this bad plan design since 2014. Every iteration since that time has gotten progressively worse. The "new and improved" stacked hybrid plan is no exception.
In an attempt to placate conservatives, the conference committee proposal will likely include a defined contribution option for new employees. On the surface, the inclusion of a defined contribution plan would seem to be a positive development. However, it does create a problem. As Rep. John McGinnis noted to Capitolwire (paywall):
"With multiple plans, one will do better than the others and in the future the members in the plans that are not performing as well will pressure elected officials for redress and will likely get it."
As noted, this proposal does not address the $60+ billion in unfunded pension liabilities that currently saddle taxpayers. Furthermore, it is unlikely that the "reforms" in the pension proposal will include changes to how funds are managed and the annual expected rate of return assumption. Pennsylvania’s pension plans assume a 7.5 percent annual rate of return (PSERS adjusted their expectations to 7.25 percent starting in July). In an attempt to meet this optimistic goal, the pension plans use active fund managers instead of investing in index funds or other passive management strategies. Using active fund managers costs taxpayers $750 million per year. Last year that cost resulted in a 0.4 percent return for PSERS and a 1.29 percent return for SERS.
Underwhelming returns on investments and chronic underfunding of the pension plans and benefit improvements by politicians have created a mess for taxpayers in the form of massive unfunded liabilities. The pension reform proposals being bandied about do nothing to address those problems, nor do they adequately protect taxpayers. Instead, the conference committee’s Rube Goldberg reform proposal gives politicians the ability to tell voters that they "did something." Pennsylvania’s current and future taxpayers who will be tasked with bailing out the system deserve real reform; not smoke and mirrors.
For those policymakers seeking a straightfordward comprehensive solution to our ongoing pension woes, you should go no further than to read our recent blog post which highlights a recent op-ed authored by actuary Richard C. Dreyfuss.