A proposed pension reform plan that would change the design of the state and school employees’ retirement plans would eventually erase the pension systems’ $47.5 billion debt and introduce a mandatory 401k-style retirement-savings plan for new public employees.
The hybrid defined benefit-defined contribution plan would produce a projected $11 billion of savings in taxpayers’ contributions to the systems over the next 30 years, according to an independent actuarial study commissioned and approved by the Public Employees Retirement Commission this morning.
Other actuarial studies put the 30-year savings between $6.5 billion and $13 billion, depending on the assumptions built into them, said commission executive director James McAneny.
It would ensure future employees of guaranteed pension income that McAneny said when combined with Social Security, would allow them to maintain an adequate retirement.
Earnings from a defined contribution plan would supplement that; however, because employees bear the investment risk, this portion of their pension income would not be guaranteed.
McAneny said the average state worker would see minimal impact from this change since they earn less than the $50,000 limit when the 401k-style portion of this pension proposal kicks in.
However, he said the higher-end income public employee earners would see an impact from having to bear the investment risk associated with this 401k-like plan and would eliminate the golden-parachute, six-figure pensions that are bothersome to taxpayers.
Absent from the plan, however, is any significant relief in next year’s budget that is facing as much as a $1.4 billion revenue shortfall. Gov. Tom Corbett had counted on realizing $170 million in savings from a pension reform plan in his $29.4 billion budget proposal.
Rep. Mike Tobash, R-Schuylkill, who is credited as the plan’s sponsor, described his proposal as a “first step toward addressing the pension crisis” that is related to, but exclusive of, the budget discussion.
“It needs to be a multi-step approach. This takes care of the first step,” he said.
Getting the actuarial study of the proposal provides lawmakers with some necessary information to aid their decision-making. While the House and Senate are expected to resume their closed-door discussions about pension reform when they return to Harrisburg next week, a vote on the issue is still probably weeks away from happening, if at all.
The Tobash proposal would:
- Affect state employees who join the commonwealth’s workforce on or after Jan. 1, 2015, and school employees who start their jobs on or after July 1, 2015. However, current employees who have a break in service would come in under the new pension plan.
- Not affect current or retired state and school employees are not affected by this proposal. Also, an amendment offered by Rep. Mike Vereb, R-Montgomery, would exempt sworn state police officers, judges and employees of Penn State, the Pennsylvania State System of Higher Education and community colleges who participate in an alternative pension plan from the new plan.
- Maintain the current defined benefit, or guaranteed pension, plan for the first $50,000 in income (that limit would rise by 1 percent annually), plus employees would contribute 1 percent of their first $50,000 for the first 25 years of employment into a defined contribution, or 401k, style plan. Employees would contribute 7 percent of their income over $50,000 or income from service over 25 years into defined contribution plan.
- Changes the current 5-year vesting period for the defined benefit plan to 10 years.
- Pensions would be calculated on the average of the highest five years’ salaries as opposed to the current three years.
- Makes the employee contribution rates for both pension uniform and sets it at 7 percent, with 6 percent contribution going into the guaranteed pension plan and 1 percent in the 401k-style plan. Currently, state employees contribute 6.25 percent and school employees contribute 7 percent of their earnings to their pension plan.
- Taxpayers’ contribution to the 401k-style plan would be .5 percent of income of the first $50,000 earnings and 4 percent for earnings above that threshold. Taxpayers’ contribution to the guaranteed pension plan would be actuarially determined but would only apply to employees’ first $50,000 in earnings.
- Eliminates the $100 per month health insurance premium supplement that school retirees receive.