Huffington Post
October 8, 2013
By Bob WIlliams

Imagine; you are a retired schoolteacher who served 35 years working with children in South Philadelphia. You planned and saved accordingly to live a happy life, and in that planning assumed your pension benefits would be there for you at the end of your career. Imagine walking to the mailbox, looking for that much needed pension check, and the box is empty. A promise was made to you by the state — and that promise is being broken, and with it your retirement security is at risk.

Retirement “in-security” isn’t a hypothetical it is a fact for millions of families from Philadelphia to Detroit to Stockton, California. The State Budget Solutions report, “Promises Made, Promises Broken — The Betrayal of Pensioners and Taxpayers,” found that state employee pensions are unfunded by a shocking $3.4 trillion nationally. The debt in Pennsylvania alone is $156 billion.

This tragically amounts to $3.4 trillion dollars in broken promises. Promises to taxpayers that public officials were managing funds appropriately and to pensioners who did nothing wrong. Police officers, firefighters, teachers and their spouses believed that these governments would keep their retirement promises. Too many Americans worked their entire lives to now learn their states cannot provide what they promised. [EXPAND Read more]

In Pennsylvania, according to official figures, the retirement systems for state and public school employees are 64 percent funded. But this figure relies on dangerously unrealistic assumptions, including of a 7.5 percent investment return.

The SBS report uses a fair-market valuation that discounts liabilities at a risk-free rate, as opposed to the optimistic investment returns used by most plans. Using more accurate, risk-free assumptions designed to fully guarantee benefit funding, the Keystone State faces a combined unfunded liability of $156 billion. The plans currently have on hand assets to pay just 35 percent of already earned benefits. This means attempts at reform must start with recognition of the true size and scope of the problem, and they must start right now.

By not reining in this underfunded pension crisis sooner, elected officials betrayed the trust of citizens by putting politics before public employees, pensioners and taxpayers.

Failing to act now only exacerbates an already untenable situation. Elected officials need to enact swift and significant reform to ensure that not only do pensioners get the checks on which they count but also that lawmakers do not have to divert funds from school programs and health care plans to cover their pension liabilities.

Half-measures, set in place to maintain a broken status quo, must be avoided at all costs.

The ideal step needed to stop the runaway train of pension costs would be a shift towards a defined contribution style retirement system. Defined contribution plans provide retirement security without putting taxpayer money at risk. Talk of increased costs as a result of switching to such a system only ignores the massive funding hole that the state has already dug for itself. Unfunded liabilities, once paid down, would become a thing of the past.

One benefit is that employees in a defined contribution plan gain control over their own retirement. They receive regular statements and immediately know if their employer did not fully fund their retirement promises.

Compare that situation to today’s defined benefit plans, in which many employees remain unaware until their pension plan reaches a crisis point and the checks stop coming. In Pennsylvania, where the state has underfunded Annual Required Contributions by $12.9 billion in the last 10 years alone, this would go a long way towards ensuring retirement security and peace of mind.

A large number of public employees are already enrolled in a defined contribution plan. Not only are they working well financially, employees are happy. The Pennsylvania State System of Higher Education Alternative Retirement Plan offers a system in which the employers contribution 9 percent of compensation, while employees contribute 5 percent. The money is then responsibly invested in one of several state-approved options, and owned entirely by the employee.

As the special session of the legislature gets underway, let’s hope that lawmakers will not be misled by overly optimistic assumptions and will instead address Pennsylvania’s pension problem with the implementation of a defined contribution plan. The state owes it to those who worked for years assuming their pensions would be there for them when they retired. Don’t break that promise. [/EXPAND]