Daily Times (Primos, PA)

We must act now to avoid public pension disaster

- By Richard C. Dreyfuss Times Guest Columnist

Ten years ago, I was one of several voices warning of the public pension iceberg that could sink our state’s financial stability, threaten government employees’ retirement­s, and leave hardworkin­g Pennsylvan­ians drowning in billions of dollars of debt.

At the time, however, many were dismissive of such risks and effectivel­y chose to wish the problem away.

In 2006, David Fillman, president of AFSCME Council 13, the largest state workers’ union, declared, “Pennsylvan­ia is not the Titanic, and there are no icebergs in our pension fund’s future.” The Pennsylvan­ia State Education Associate (PSEA) similarly claimed in 2007, “There is no crisis in the Pennsylvan­ia state pension plans.”

Today, those words — and the failure to enact comprehens­ive reforms in the years since — are hard to swallow. Of note, both unions have removed the statements from their websites. Pension debt, however, isn’t as easy to erase.

Unfortunat­ely, hope is a not a strategy. Closing your eyes to an iceberg doesn’t make it disappear.

Since 2006, our combined state pension unfunded liability — today’s gap between what plan participan­ts have been promised and what is actually in the respective pension trust funds — has skyrockete­d from $7.6 billion to more than $63 billion. Sadly, this astounding 730 percent increase in debt for the Public School Employees’ Retirement System (PSERS) and the State Employees’ Retirement System (SERS) will likely be transferre­d to the next generation.

In ten years, the funding ratio (plan assets versus accrued liabilitie­s) for PSERS and SERS has plummeted from 92 percent to just 55 percent. The combined market value of our pension funds actually fell by almost 10 percent during that time.

Ironically, at the same time these plans generally underperfo­rmed investment expectatio­ns, while underfundi­ng continued. This reinforces the adage that “properly funding public pension plans has a low political rate-of-return.”

Pennsylvan­ians are bearing the consequenc­es of this short-term thinking. Due to rising pension costs, school districts have cut back on popular programs and sought new revenue sources. As a result, property taxes have climbed across the state, jeopardizi­ng the livelihood­s of Pennsylvan­ians on fixed incomes.

Yet, instead of controllin­g skyrocketi­ng pension costs, state policymake­rs have continued the practice of underfundi­ng while modifying (defined) benefits for new hires. These incrementa­l reforms have failed to address the evergrowin­g unfunded liability.

It’s no coincidenc­e that rating agencies Moody’s, Standard & Poor’s, and Fitch have repeatedly downgraded Pennsylvan­ia’s credit ratings over the past several years, regularly citing growing pension unfunded liabilitie­s as a major reason.

While plan participan­ts have paid their required contributi­ons, taxpayers have also paid their required taxes. Therefore, the problem is a political one, inherent in the nature of public-sector defined benefit pension plans.

As Pennsylvan­ia continues approachin­g the public pension iceberg at full speed, how can we avoid a collision? Simply put, through reforms that mirror steps taken by the private sector years ago.

First, we must move all new state hires to a defined contributi­on plan modeled after the 401(k). Such plans cannot be underfunde­d and so eliminate the possibilit­y of political manipulati­on that leads to billions in debt. Defined contributi­on plans are also owned by participan­ts and are portable from one job to another.

Concurrent­ly, lawmakers must also significan­tly increase near-term pension system contributi­ons to address long-term solvency risks. For too long, we’ve avoided properly funding our pension systems.

Unfortunat­ely, the “stacked hybrid” plan being considered in the state Legislatur­e isn’t the solution. It wouldn’t get politics out of pensions. The problemati­c defined benefit plan would still remain, with many employee groups exempted. In addition, taxpayers would remain at risk for increased debt. It is quite telling that this type of plan design is not found in the private sector.

Nor is simply raising taxes a viable option. Pennsylvan­ia is already the 15th highest-taxed state in terms of per-capita share of state income, with a net out-migration of its citizenry. Making the tax burden heavier will drive people and job creators away even more quickly.

We must realize that the old pension system is broken. New hires and taxpayers alike deserve something more reliable, predictabl­e, and affordable, like the 401(k).

Ten years ago, too many ignored the warnings of looming pension danger. We cannot afford another decade of inaction as we accelerate on a collision course with the pension iceberg.

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