August 14, 2012

PSEA President: Proposed pension changes will have to beat the current ‘3 Percent Solution’

Any proposed changes to Pennsylvania’s public employee pension systems will have to measure up to the savings already achieved in reforms enacted two years ago, with the passage of Act 120 of 2010.

That’s the message delivered from PSEA President Michael Crossey, commenting on the joint hearing of the House State Government and Finance committees on pension legislation, held August 14 at the state Capitol.

“It all comes down to simple math,” said Crossey. “The cost to the taxpayers for new public school employees subject to the provisions of Act 120 of 2010 is 3 percent for the Commonwealth and school districts combined.

“Any changes to the current pension plan must be lower than 3 percent, or they will not offer long-term cost savings to taxpayers or the Commonwealth,” Crossey said. “Current proposals to put new employees in an alternate type of retirement plan will actually increase the cost of retirement benefits to taxpayers.” 

Crossey pointed out those school employees never stopped paying their 7.5 percent of salary toward their pensions, even when the Commonwealth was not making adequate payments over the last 12 years.

“School employees’ pension benefits have not gone up, but the cost to the Commonwealth and school districts is climbing despite Act 120 because previous Legislatures kicked the can down the road by deferring payments,” Crossey said. “For a decade the General Assembly made shortsighted decisions by not properly funding the obligations it had to the pension systems. The situation became critical with the investment losses all public and private pension systems experienced in the 2008-09 economic downturn."

Crossey said many policymakers do not understand the full significance of the changes Act 120 of 2010 made in terms of reducing the taxpayers’ long-term cost of providing pension benefits.

  • The pension multiplier, which determines the final level of the retirement benefits, was reduced by 20 percent, and dropped from 2.5 to 2. The vesting requirement was increased from five to 10 years;
  • A cap was placed on the maximum pension benefit;
  • There were substantial increases in the age and years of service required to retire at full benefit;
  • The option that allows members to withdraw their own contributions when they retire was eliminated for new employees;
  • The basic contribution rate was effectively raised, because new hires are paying the same amount for a reduced level of benefits; and, 
  • Pennsylvania was the first in the nation to require new hires to pay an additional “risk sharing” rate of up to 2 percent if the Public School Employees’ Retirement System does not meet its earnings assumptions. In the event of a future economic downturn, employees too will directly share in the pain.

“This is a debt that will have to be paid off regardless of any future changes that might be made to the pension system for future employees, current members, or even if the General Assembly abandoned the pension system altogether,” Crossey said. “In 2010, the Legislature made the best of a difficult situation by creating what they then considered a manageable payment plan.”



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