Five things about Pennsylvania’s major pension overhaul that reduces benefits, but not billions in debt

Jan. 03--On Jan. 1, Pennsylvania's new pension overhaul kicked in for most state workers and will start on July 1 for all new school employees.

Approved and signed into law in 2017, the legislation marks a historic change in the way state pensions are funded.

Here are five things about the change.

It came after years of inaction on the part of the state Legislature to deal with the state's debt-ridden pension systems.

At the time the overhaul was passed, the state's two big retirement systems -- Public School Employees Retirement System (PSERS) and State Employees Retirement System (SERS) had a combined $72 billion in debt.

The debt was caused by three main factors. From the mid-1990s until 2010, governors and lawmakers in both parties decided not pay the employers' full annual share of workers' retirement benefits and they permitted school boards to do the same thing.

In that time, lawmakers also gave themselves and all other employees and retirees retroactive pension bumps that sapped assets. Then market downturns crushed those assets further.

In 2013, as the state was still in the throes of the Great Recession, then Gov. Tom Corbett issued an SOS over the pension debt, which was $30 billion lower. He pitched the idea of cutting benefits and putting state workers and teachers into a 401-k type plan.

As with other attempts over the years, Corbett ran into a wall of opposition from unions representing teachers and state workers.

Corbett also ran into opposition from the GOP-controlled House and Senate who claimed his plan was unconstitutional. Those same lawmakers then tried to ram Corbett's plan down the throat of newly elected Democratic Gov. Tom Wolf, who had the same legal concerns lawmakers expressed a year earlier.

The new system combines ideas that were kicked about for years.

Under the new system, newly hired state workers and teachers will no longer receive fully backed pensions. They will have two options.

One is a hybrid plan that puts about half the retirement savings in a traditional, taxpayer-backed fund. The other half goes into a private sector 401(k) that rides the stock market's ups and downs.

The other option lets workers put all their retirement money into a 401(k) account.

The law will save money but do nothing to erase the pension debt that generated the pension reform mantle.

The new pension options will save taxpayers $43.3 million to $140 million annually over 30 years, according to a financial analysis conducted by the Senate.

Gov. Tom Wolf called that amount "a significant achievement."

Because the plans are not mandatory for existing elected officials and personnel, they will not lower PSERS' and SERS' debt, which is now said to be about $74 billion.

Rep. Mike Tobash, R-Schuylkill, one of the law's main architects, agreed the debt will remain. However, he said, taxpayers will experience less risk of higher debt because the plans are not fully backed by taxpayers.

"It's shifting the risk," Tobash said recently.

State workers and teachers would have less money in their retirement.

Pension benefits would fall 18 percent for new school employees, and 6 percent for affected state workers, compared to employees hired since 2010.

That translates into retirement reductions of $7,327 to $33,173 for school workers served by PSERS. Benefits would fall $6,452 to $34,048 for new state workers covered by SERS.

Those figures are for a 65-year-old who retires with 35 years of service and an average annual final salary of $60,000.

The 401(k) is not free, either.

Future state workers will be charged $24 a year, plus an annual asset fee of 0.07 percent, from the company SERS hired to run the 401(k), according to the contract. That company is Great-West Life & Annuity Insurance of Denver.

State lawmakers exempted themselves from having to follow the new system.

Lawmakers, who were sworn into office for the 2019-20 legislative session, are excluded from mandatory participation in the reduced plans. Lawmakers also excluded state law enforcement and corrections officers.

Rather, lawmakers gave themselves and all existing employees the option of freezing their old plans, and then opening one of the new plans. Those eligible have until March 31 to decide.

"There's no chance all or even a majority of the state's 253 lawmakers will line up for the new pension plans, said Barry Shutt, a retired Agriculture Department worker from Lower Paxton Township, Dauphin County, who advocates for lawmakers to pay off the state's full pension debt.

"They are not inclined to do anything to damage their future benefits," Shutt said.

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