December 2009 - Looming Pension Crisis Could Mean Massive Tax Hike for Pennsylvania Families
By Stanley Saylor (R-York), chairman,
Pennsylvania House Republican Policy Committee
When the last fiscal year ended on June 30, Pennsylvania found itself with a budget deficit of more than $3 billion. It is only December, and already the revenue projections for the current fiscal year are more than $217 million below estimates. Unfortunately, our current economic troubles pale in comparison to the problems we will face in 2012-13 if something is not done to address the looming crisis in our public employee pension systems.
The Public School Employees’ Retirement System (PSERS) and the State Employees’ Retirement System (SERS) are the pension plans for hundreds of thousands of Pennsylvania teachers and public employees. Both are defined benefit plans, which means each employee is entitled to a specific retirement benefit, established by a formula based on years of employment, at his or her retirement. These plans are funded by a combination of contributions from the employee, the employer which in the case of PSERS and SERS means the taxpayers of Pennsylvania, and returns on investments made by the retirement system.
When the markets were booming in the 1990s, PSERS and SERS were flush with cash. Because investment returns were high, contribution amounts for employers and employees were reduced and benefits were increased for retirees of both systems.
Following the terrorist attacks on our nation on Sept. 11, 2001, the financial markets experienced a dramatic downturn. The return on investments made by PSERS and SERS began to diminish and both systems began to feel a financial pinch. Act 40, which passed in 2003, changed the funding methodologies for both systems and essentially allowed them to spread the effects of those investment losses over 30 years, while enjoying the benefit of investment gains over a ten year period. While Act 40 enabled the pans to spread the losses over a period of years, the 10-year period is set to expire in 2012-13.
In addition, our nation is now enduring an economic recession, the second of this decade, and this is having a serious negative impact on the value of these plans that will require reforms as well as additional contributions. Because the employee contribution level is set by law, if investment returns are down, as they are now, Pennsylvania taxpayers, as the ultimate employer of public employees, are on the hook to make up the difference when the 10-year period expires in 2012-13. This is sobering news and it is particularly troubling because the federal stimulus funds are set to expire at approximately the same time and Pennsylvania taxpayers will already be under tremendous budgetary pressure.
While the exact amount of the rate increases depend on market conditions, it is clear that both PSERS and SERS are facing substantial rate increases in 2012-13. This is a crisis that requires immediate attention by the General Assembly. Clearly something must be done to reform the systems and offset these massive liabilities or Pennsylvania families will be facing a large tax increase.
Many people have suggested the best way to address the crisis is to switch from a defined benefit plan to a defined contribution plan. Unlike a defined benefit plan which promises retirees a specified monthly benefit at retirement, a defined contribution plan requires the employer and the employee to make contributions to the employee’s individual account under the plan at a set rate. The employee’s retirement benefit is based on contributions plus or minus investment gains or losses.
While this seems like a good solution, it should be noted that, pursuant to the Constitution and supporting case law, benefits cannot be reduced for current employees already enrolled in the retirement system. So, while switching to a defined contribution system could help avoid this problem with future system participants, it will do nothing to resolve the immediate problem we, as Pennsylvanians, are facing.
As chairman of the House Republican Policy Committee, I asked our Government Reform Task Force to examine this problem and consider legislative solutions to help us avert this crisis. The task force has been meeting with various stakeholders including school boards, educators, local governments and representatives from SERS and PSERS. Its members are currently developing a legislative package to address this crisis and will offer a bill in the next few months.
Pennsylvania’s public employees enjoy some of the greatest retirement benefit plans in the nation. But if something is not done to address this looming crisis, state government will not be able to afford to continue paying for them without imposing a massive tax increase on Pennsylvania families.
Every option is on the table as the task force prepares its recommendations. I look forward to hearing their proposals and to working with my colleagues in the Legislature to develop a solution that will enable us to avert this crisis without imposing an enormous tax increase on hardworking Pennsylvania families. I also look forward to continuing this dialogue with my constituents
Rep. Stanley Saylor
94th District
Pennsylvania House of Representatives
(717) 244-9232
(717) 783-6426