Pennsylvania takes baby step to tackle public pension crisis

Newly hired state and public school employees in Pennsylvania will receive reduced pension benefits under a law signed last week by Gov. Ed Rendell, but the $16 billion reduction in pension payments over the next 25 years pales in comparison to what the taxpayer contributions to various plans will be.

The new law does not affect pensions of individuals already in the system, but for newly hired state workers, including legislators, teachers and other school employees, it reduces benefits and increases the retirement age. Thus, the time it takes for new hires to be vested goes from five years to 10 years, while the retirement age for state workers goes to 65 from the current 60, and to 62 for school employees.

However, given the skyrocketing cost to taxpayers of funding public pension systems not only in Pennsylvania but around the country — we have written extensively about the crisis in Ohio — the bill signed into law by Gov. Rendell is a baby step.

Consider some facts, as laid out in an article by Christine Erickson on the web site “Free Enterprise Nation — The Voice of the Private Sector”: In the 2011-12 fiscal year, the employers (taxpayers) contribution to the State Employees’ Retirement System (SERS) is projected to increase to $1.77 billion, from the current $300,000-plus. But even with such a spike, the plan would only be funded 75 percent in the next decade.

Likewise, the Public School Employees’ Retirement System (PSERS), which covers teachers and other education workers, will gobble up $1.86 billion in taxpayer contributions for fiscal 2011-12, compared with $650 million currently.

As Erickson writes, “It is important to note that this is not a temporary spike — the employer contributions to SERS and PSERS will hit a combined $5 billion by 2015 and continue to rise each year. This means that between 2010 and 2020, Pennsylvania taxpayers will contribute around $40 billion just to these two plans.”

But that’s only on the state level. Pennsylvania has over 3,000 local retirement systems — in cities, towns and counties — that require an employer contribution.

The situation is so dire that in the city of Philadelphia the sales tax was increased by 1 percentage point to facilitate increased pension contributions, and yet the pension funds for municipal workers are only 45 percent funded.

During the debate on the pension rescue bill in the House of Representatives, Rep. Glen Grell, R-Cumberland, who helped craft the measure, was quoted by the Philadelphia Inquirer as saying, “We can complain that this bill doesn’t go far enough or we can approve this bill, scale back the overly generous pension plans for all employees and stop the bleeding.”

Breathing room

It is clear that the new law won’t stop the bleeding; at best, it gives state officials some breathing room while they find a solution to the bigger problem.

As more states struggle to keep their public pension systems from imploding, it’s clear that a change of major proportions is needed.

According to the article by Erickson, the Pew Center on the States looked at 231 state employee pensions and found the total required employer contribution in 2008 was $64 billion. Since then, employer contributions in some of the better-managed funds have more than doubled, and in some pension systems, increased exponentially.

A national commission on public pension systems is needed to find a solution to the ever increasing cost to the taxpayers.