Maintaining Defined Benefit Programs Good for PA Taxpayers

Pennsylvania should follow the lead of more than 40 states which have addressed pension funding problems by modifying defined benefit programs and not engaging in wholesale changes to retirement programs for state workers and teachers, according to a panel of state and national pension security advocates briefing lawmakers and reporters at the state capitol today.  

The experts charged that legislative proposals that would move teachers and state workers from a traditional pension program to defined contribution plans would be more expensive to taxpayers and expose the state to hidden costs.

To date, more than 40 states nationwide have updated pension systems since the recession. The vast majority have ensured long-term sustainability simply by modifying defined benefit plans.

“Pennsylvania enacted Act 120 in 2010 which made changes to the state pension system that significantly reduced the long-term cost of benefits--and those changes need time to work,” said Sarah Mysiewicz, Senior Legislative Representative, Financial Security & Consumer Affairs, State Advocacy & Strategy Integration, AARP. “For the current fiscal year alone, Act 120 will save the Commonwealth approximately $2.2 billion ($1.4 billion contribution to PSERS and $813 million to SERS) and school districts approximately $1.1 billion.”

Mysiewicz added that eliminating or limiting defined benefit plans is detrimental not just to individual retirees, but to state and local economies, particularly in rural communities.  

“Defined benefit plans are economic stabilizers,” she said. “States cannot afford to forfeit the economic growth and stability that these plans provide.”

Research shows defined benefit plans can deliver the same benefit at about half the cost of defined contribution plans, said Diane Oakley, Executive Director, of the National Institute on Retirement Security.

“Closing or freezing defined benefit plans and switching to individual accounts does not address underfunding and can entail significant additional costs while further undermining the ability of Americans to be self-sufficient in retirement,” she said.

While the stated purpose of pension reform proposals is to ease budget woes and reduce the taxpayer’s burden, the reality is those plans would do just the opposite, according to Stephen Herzenberg, Executive Director, the Keystone Research Center.

“Hidden costs will include a reduction in investment earnings when Pennsylvania’s defined benefit plans stop taking in new members and higher administrative costs and lower returns for defined contribution plans than professionally-managed defined benefit pools,” he said.  “Taxpayers, employees, and public employers all pay a price if the commonwealth switches to individual accounts that deliver only half as much retirement security for any given amount of contributions.”     

The bottom line is thousands of teachers and state employees have spent a career serving the public and contributing a significant portion of each and every paycheck to their pension – on time and in full in return for an average retirement benefit of $23,466 annually (PSERS) or $24,888 (SERS).   

“We can’t change the rules at the end of the game, especially when they didn’t cause this problem,” said Mysiewicz. “Altering benefits, even on a forward-going basis, is likely to cause prolonged legal battles and threaten financial security for seniors in retirement.”

“AARP believes any reform proposals must ensure that the state honors its pension commitment to retirees and near retirees so its citizens can be self-reliant and live with dignity in retirement,” she said.