Senate passes transformative pension reform plan

Harrisburg>>The state Senate voted 40-9 June 5 to pass historic pension reform that Pew Charitable Trusts has said “would mitigate more risk” than reforms passed in any other state “while maintaining or improving retirement security for workers.”

SB 1, sponsored by Senate Majority Leader Jake Corman, would enroll new state employees and school teachers in a side-by-side hybrid plan comprised of a defined benefit component and a 401(k)-style component. New employees could, instead, choose to enroll solely in the 401(k)-style plan, and current employees could choose to opt in to the new system.

“Today’s vote brings transformative pension reform one step closer to reality in Pennsylvania,” commented Nathan Benefield, vice president and COO for the Commonwealth Foundation. “While this bill does not completely solve the pension problem, SB 1 represents the type of structural reform that will put Pennsylvania on a path toward long-term fiscal stability while protecting public employees and all taxpayers alike.”

For decades, private-sector companies have been transitioning to 401(k)-type plans—and for good reason. Employees benefit from these plans because they can easily be taken from job to job, and they cannot be underfunded. Both are failings of traditional, defined benefit pensions. Meanwhile, 401(k)-style plans offer employers predictable costs and dramatically reduce risk.

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With these benefits, it’s no surprise more than 80 percent of Fortune 500 companies offer exclusively 401(k)-style plans, while fewer than 5 percent still have traditional pension plans.

“Our current pension system is not working for public employees or for any taxpayers,” Benefield continued. “By enacting this reform, Pennsylvania would be leading the country in implementing the largest shift in taxpayer risk of any pension reform effort nationwide. More importantly, we would be giving public workers choices they are now denied while taking a significant first step toward future reforms.”

Pennsylvania’s pension crisis has been more than a decade in the making. Fifteen years ago, the state’s two public pension plans, the State Employees’ Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS), held a surplus. Today, the plans’ unfunded liabilities are an astounding $76 billion. In the past ten years alone, unfunded liabilities have grown by 900 percent, from $7.6 billion in 2006 to $76.46 billion last year.

Over the past five years, 99 percent of school districts seeking exemptions to raise property taxes above the state cap cited pension costs. Not only are school districts under pressure, the current pension system fails most new teachers: just 36 percent are projected to vest in the pension system.

“We applaud the Senate for making pension reform a priority,” Benefield concluded, “and we urge the House and Gov. Wolf to act swiftly to make this reform law.”

Nathan Benefield and other Commonwealth Foundation experts are available for comment. Please contact Gina Diorio at 862-703-6670 or gld@commonwealthfoundation.org to schedule an interview.