As we’ve written before, Pennsylvania faces an ongoing standoff over its budget and at least part of the fight has to do with pensions. Earlier this month, Democratic Governor Tom Wolf and Republican leaders in the state legislature announced a framework budget agreement to resolve the standoff. Two weeks on, it’s still unclear if the budget battle is over. No legislation has been introduced and there are still unresolved issues, particularly over taxes and whose taxes will increase–the shale industry, for example, would walk away unscathed. What the proposed budget framework does for pensions, however, is disheartening.
The proposal would introduce a side-by-side hybrid pension plan for new employees. This means that from the first dollar of pay, part of an employee’s retirement contribution goes into a defined benefit pension and part goes into a 401(k)-style plan. This is sold as a cost-saving measure, even though it does nothing to cut costs. What it actually amounts to is a benefit cut for new employees, a benefit cut that could be as high as 23 percent.
There are other problems with the pension proposal in the budget framework. It’s only actual cost-saving measures comes from cuts in benefits for existing employees in their future years of service. These are almost certain to be struck down as unconstitutional by the courts. The plan also does nothing to address the state’s current unfunded liabilities and it would actually increase costs because defined contribution plans are less economically efficient than defined benefit plans.
Economist Steve Herzenberg of the Keystone Research Center has released a report analyzing the pension proposal in the budget framework. He explains in greater detail how this proposal fails to live up to the model of other side-by-side hybrid pensions, such as that for federal employees. To be clear, this issue is not yet settled. In the coming weeks the pension proposal in Pennsylvania could get better- or worse. Let’s hope that Governor Wolf and state legislative leaders look for ways to improve the pension proposal in order to strengthen retirement security for Pennsylvania’s public employees.