Pennsylvania legislators have known for some time that the state is $40 to $50 billion (that’s “billion” with a “b”) short of the money needed to cover future pension payments to state employees and teachers.
There has been no shortage of ideas for how legislators can begin to defuse the pension time bomb.
However, right now, there is a shortage of time for the Legislature to work out a responsible solution.
Legislative leaders have left the House and Senate only five days of work to pass bills between now and January.
This, from a legislature that is supposedly full-time and costs Pennsylvania taxpayers $229 million a year. (The bill would have been even higher in this year’s budget, but Gov. Corbett used his veto to slash the Legislature’s spending authority by $51 million.)
The huge pension shortfall has several causes. In better financial times, Pennsylvania politicians boosted retirement benefits and decided not to pay the state’s full share, counting on booming investments to make up the difference. (Teachers and state employees, however, made their required contributions all along.)
Legislators have had plenty of time to flesh out the details and shape a version that’s fair to both employees and taxpayers, but they haven’t.
Then came the great financial market crash of 2008. It wiped out much of the investment returns needed to pay the generous increase in retirement benefits that politicians had unwisely promised.
Adding to the strain on current pension resources is an aging workforce. More workers are heading into retirement and need their pension payments. Meanwhile, tight financial times mean that smaller numbers of new workers are coming in to replace those who retired – and that reduces the flow of new money into the long-term pension investments that bring the greatest financial returns.
The Legislature made some retirement changes in 2010 and they are helpful. For new employees, lawmakers cut the formula for calculating benefits, increased the retirement vesting period, and eliminated the cash payout option.
But the basic grim reality remains unchanged: Over the coming decades, the state is more than $40 billion short of what it will have to pay in retirement benefits.
One of the more promising potential solutions is a “hybrid” plan offered by Rep. Mike Tobash (R-Schuylkill). For new hires, the state would offer guaranteed pension payments up to a certain salary level. Above that salary, the state would contribute money to a 401k style plan, with investments that employees control for themselves.
How a hybrid plan works
The hybrid plan guarantees a certain modest benefit to future retirees, while capping the state’s long-term exposure for making guaranteed pension payments. Adding the flexibility of a 401k retirement fund on top of the basic benefit could make public employment more appealing to the new generation of job-hopping workers.
Tobash’s hybrid plan is the best available framework for making a meaningful dent in the state’s long-term exposure for future pension benefits.
Legislators have had plenty of time to flesh out the details and shape a version that’s fair to both employees and taxpayers — but they haven’t.
Democrats have been unified in resisting major pension changes, while the Republican majorities in both houses have not been able to unite behind any pension reform plan, despite prodding from their fellow Republican in the governor’s mansion.
As the Legislature winds down its work, there is precious little time to produce the action that the state’s pension crisis demands – but if legislators don’t, voters will want to remember that come election time.
This post has been updated with a byline that indicates it is a commentary from the PennLive editorial board.
http://www.pennlive.com/opinion/2014/10/pennsylvanias_pension_time_bom.html