Don’t play politics with pension reform
11/06/2014 12:32AM ● Published by Lev
By Katrina Anderson
Bill Frye taught in Pennsylvania public schools for more than 20 years. For him, our state’s public pension crisis isn’t political, it’s personal. As a retired Westmoreland County teacher, a farmer, and a father, Frye recognizes that ignoring pension reform will have long-lasting effects on him, his family, and his neighbors.
Seeing a $50 billion pension debt obligation, Frye is rightly concerned that state government won’t be able to deliver on its promises.
Until recently, cuts to public pensioners’ earned benefits were unthinkable. But look no further than Detroit, where state workers and retirees recently voted to accept a 4.5 percent cut in their pension benefits or Stockton, Calif., where 60 percent cuts are possible.
The idea that states should also be able to declare bankruptcy to restructure pension debt has been floated repeatedly, particularly in Illinois, which is facing a $100 billion liability.
Clearly Frye has reason to worry. First, that the pension he earned could be reduced; and, second, that his neighbors could be driven out of their homes by skyrocketing property tax hikes fueled by rising pension costs.
The fact is, pension payments are the number-one reason local property taxes are increasing. Over the last five years, a stunning 98 percent of exemptions granted to school districts to raise property taxes higher than inflation were tied to pension costs.
Indeed, from 2008-09 to the current school year, annual pension contributions by school districts have risen by almost $2 billion. That’s more than $600 per homeowner -- just to pay the increase in pension costs.
Put another way, that increase amounts to the salaries of more than 30,000 teachers.
Worse, in the next five years, pension costs are set to increase another $1.7 billion -- or $550 more per homeowner. That’s really what politicians and union leaders mean when they say “let Act 120 work.”
A better solution? Reform the system now to make it sustainable for workers and fair to taxpayers.
The consequences of inaction are painful: higher property taxes and teacher layoffs. For Frye it means his kids could be burdened with debt from his own pension.
Teachers and state workers aren't the ones responsible for this crisis. They paid into the system just like they were asked. But lawmakers made bad promises to good people -- using taxpayers’ money as a backstop.
It’s time for legislators to act now and clean up this mess.
To be honest, the time to act was eight years ago. But for too long government union leaders and lobbyists, from the Pennsylvania State Education Association (PSEA) especially, have denied there was a pension crisis and fought against any attempt at reform.
The first step is changing state-level retirement plans for lawmakers and new teachers and government workers. This would not erase our $50 billion pension debt, but it would prevent the problem from getting worse while protecting families from higher taxes.
Our current pension system has a huge flaw: It’s too easy to boost benefits when times are good and skip payments when they aren’t.
Moving new employees to a well-designed 401(k)-style plan would prevent deliberate underfunding and make “kicking the can down the road” impossible.
Such reform would also benefit employees. As workers change jobs -- an average of 10 times in a career -- retirement portability and personal ownership of investments have never been more important. Such flexibility simply can’t be found in the current system.
Not only has most of the private sector already left the old system behind -- including the Wolf Company, founded by Democratic gubernatorial candidate Tom Wolf -- but many states have as well. Since 1996, 18 states have converted to plans which build on the 401(k) model.
There are several bills in the General Assembly that would address this crisis for new employees, including plans that combine aspects of the current system and 401(k)s into what’s commonly called a hybrid plan, as well as reforms addressing the municipal pension crisis.
Conventional wisdom says lawmakers won’t do anything significant shortly before an election. But many statesmen in the legislature are fighting on behalf of retired teachers like Bill Frye to address this issue now.
They should understand -- as property tax payers already do -- that the stakes are too high to play politics and ignore pension reform.
Katrina Anderson is a senior policy analyst and director of government affairs for the Commonwealth Foundation (CommonwealthFoundation.org), Pennsylvania’s free market think tank.