Changing retirement benefits for future state and school district employees is not enough to save taxpayers or the pension system. Moving all new hires into a 401k-style, defined contribution (DC) plan would reduce future risks, but it would not address our $74 billion in unfunded pension liabilities. The state of Illinois finds itself in a similar situation with an unfunded liability of nearly $130 billion. Unlike Pennsylvania Democrats and some Republicans, Illinois Democrats are willing to acknowledge reality and appear ready to address the benefits of current employees.
According to an article from PennLive:
Illinois’s state Senate President has drafted a bill to freeze "pensionable compensation" for workers who wish to keep an existing 3 percent yearly bump in pension payments through the course of their retirement.
Sen. John Cullerton’s bill would present workers a choice between keeping the post-retirement cost-of-living adjustment and seeing their base pay for pension purposes capped at current levels, or letting future raises continue to count for pension purposes, in exchange for a much smaller COLA in retirement.
The compounding, post-retirement adjustments have been identified as a major cost driver in Illinois’s pension system. Cullerton claims his plan – which would apply to teachers, public university employees and legislators – can save the state’s taxpayers $1 billion a year…Pension changes aren’t something the Chicago Democrat wants to do to his political allies in organized labor, Cullerton conceded, but he sees it as a necessary and tolerable bargain with Republican Gov. Bruce Rauner as part of a larger deal to end the state’s two-year state budget impasse.
Here’s the key pitch to his union friends: "We’re going to save $1 billion a year, and that billion is going to go right back into our discretionary spending for schools, higher education and human services.
It’s too bad that we have to do it, but it’s not as Draconian from a Democrat’s point of view," Cullerton said.
Pennsylvania’s pension systems do not have all of the same structural problems as Illinois. However, we share the problem of a massive unfunded liability. Politicians are quick to promise extravagant benefits, but are loath to pay for them, and that is true regardless of geography.
Pennsylvania’s Democrats and some Republicans are completely unwilling to address the issue of the future benefits for current employees for two main reasons. One is that public employee unions are the largest source of political spending in the state and the other is a legal precedent that would certainly make changes for current employees the target of a lawsuit. Neither of those reasons is sufficient cause to do nothing. Unless our unfunded liabilities are addressed quickly, Pennsylvania’s long-term fiscal solvency is at risk.