Pension Reform: Learning from Others

Member Group : Commonwealth Foundation

For Immediate Release
Commonwealth Foundation
Contact: Cindy Hamill
(856) 607-4208

It’s Not Too Late to Save PA’s Economy
Pension Reform: Learning from Others

May 27, 2014, Harrisburg, Pa. – Pennsylvania is not the first state to be in economic trouble due to, among other things, an unsustainable pension mandate. So it only makes sense to learn from those who have gone before us and found success.

In a report released today by the Commonwealth Foundation, Scott Beaulier, PhD, Chair of Economics and Finance and director of the Manuel H. Johnson Center for Political Economy at Troy University, recommends Pennsylvania implement a 401(k)-style plan for new public employees similar to a measure passed by Oklahoma’s legislature just last week.

Proven success

Moving new public employees to a defined contribution plan, similar to a 401(k), and making adjustments to compensation formulas for current employees would save Pennsylvania $52 billion over the next 30 years.
Private sector businesses have been moving in this direction over the past 30 years. State and local governments have begun to follow suit because of the proven benefits:

• Portability – Defined contribution funds can be carried with the worker as he or she changes jobs.

• Fully funded – All of the funds promised to an employee are paid up front and become the employee’s property. There is no risk to firms or public sector entities of ever carrying a funding liability.

• Potentially higher returns – A growing body of evidence suggests that returns from a lifetime of defined contribution retirement accounts produce higher returns than individuals cashing out on defined benefit programs.

• More predictable costs – Defined contribution plans make the employer responsible for a specified dollar amount each year, not a defined payout whose funding is dependent on unpredictable stock market returns or other economic conditions. Such predictability protects taxpayers and public sector workers from underfunding due to political manipulation.

Dr. Beaulier concludes:

"The strongest case for shifting state pensions to defined contribution plans is a financial one: There is no way a state like Pennsylvania will be able to put an end to its rising pension liabilities unless it learns from thousands of private sector firms and closes its current defined benefit programs. Once the program is closed, the state should shift all new employees and any current employees that want to convert to defined contribution plans. Such a shift is consistent with best practices in the private sector, and it is the only way to protect taxpayers while granting workers control over their own retirements."
Reform is inevitable

Pennsylvania is among the worst states in the country when it comes to unfunded pension liabilities. The two separate state pension systems, the State Employees’ Retirement System (SERS) and the Public School Employees’ System (PSERS), have official unfunded liabilities totaling more than $50 billion dollars. Currently, they are less than 60 percent funded. Dr. Beaulier states:
"Pennsylvania’s funding ratios make pension reform inevitable. By 2019, pension costs will consume 9.8 cents of every state General Fund dollar (vs. 4.2 cents in 2013), crowding out essential government services such as public education, public safety, and transportation."

Dr. Beaulier is available for interviews via the Commonwealth Foundation on solutions to Pennsylvania’s public pension crisis.

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For more information, please contact Cindy Hamill, director of strategic communications for the Commonwealth Foundation at (856) 607-4208 or [email protected].
The Commonwealth Foundation, founded in 1988, crafts free-market policies, convinces Pennsylvanians of their benefits, and counters attacks on liberty.