Op-Ed: Pension Reform Biggest Policy Challenge Facing PA


Pennsylvania’s pension crisis is one of the most serious financial challenges of our time.

Each year, lawmakers and the governor explore ways to better manage the state’s resources and send new money to programs that provide the greatest benefits to our communities – most notably, our schools.

Unfortunately, while the state has devoted hundreds of millions of new dollars to public education in each of the past several budgets, very little of that money has been devoted to educational programs for students. Instead, this money has been used almost entirely to meet rising pension costs.

The state budget isn’t the only place in which the pension problem rears its ugly head. At the local level, school boards have enacted painful increases in property taxes to meet growing pension obligations.

The impacts of this crisis are staggering. The state’s two largest public employee pension systems required about $1 billion in 2010. Today, that number has grown to more than $6 billion for the upcoming fiscal year, nearly 20 percent of our entire annual state budget.

Although lawmakers have worked for nearly a decade to fix the problem, solutions have proven elusive – until now.

An unprecedented bipartisan effort between lawmakers and the governor led to passage of Senate Bill 1, a historic pension reform bill that will transform the retirement system for teachers and state employees and limit financial risks to taxpayers.

It is estimated that the bill will save approximately $5 billion over the next 30 years, as well as an additional $3 billion resulting from better retirement investment management.

If the state’s investments don’t meet expectations, the taxpayer will no longer bear the brunt of that burden. That could result in savings upwards of $20 billion if our economy suffers any kind of prolonged downturn similar to the 2008 recession.

That approach would represent the most significant shift in risk and taxpayer exposure than any other pension reform plan in the country.

Part of the challenge in solving this problem is the importance of providing a competitive retirement benefit to teachers and state employees. I’ve had the privilege of visiting a number of local schools throughout Lancaster County, and I can attest to the quality of the men and women who are educating our children.

The question I am asked most frequently about any pension reform plan is how it might affect retirees and current employees. Let me be perfectly clear – this plan would in no way affect the benefits earned by retirees or current employees, and it would not change the system for current employees going forward.

The changes would only apply to new hires, although current employees would have the option of participating in the new system if they decide it betters suits their retirement needs. 

Lancaster County school students are benefiting from the outstanding work of our teachers locally, and I am grateful that our schools have done such an incredible job of selecting the right candidates for the job. But at the same time, we must be cognizant that not every teacher chooses to remain in the same profession for 20, 30 or even 40 years.

Many current employees appreciate the current defined benefit system, but that system comes with a big drawback – those benefits are not portable. If a teacher or state employee takes a new job in the private sector, they can’t take that benefit with them. Much of that value is lost.

In today’s economy, teachers who stay in the same position for an entire career are the exception, not the rule. More than two-thirds of teachers spend less than 20 years on the job. About half of all educators hired in the past 10 years have already left the profession.

Senate Bill 1 creates a retirement benefit for new hires that recognizes the realities of today’s workplace. It provides a mechanism for teachers and other public-sector employees to explore different career options without fear of losing benefits.

While future employees will bear some of the burden if retirement investments fail to meet expectations, a new provision was added to ensure employees could also share in the benefits if the economy prospers. The bill ensures that during a period of prolonged period of economic growth and strong investment returns, employees could pay a lower contribution rate and still enjoy the same retirement benefit.

The legislation passed by the General Assembly fixes one big part of the equation. It limits future risk to taxpayers and creates a system that will be more sustainable in the future. But other challenges remain.

The recession caused unfunded liabilities in the two pension systems to balloon to more than $60 billion, and some estimates place that number even higher. That’s almost twice the total of the entire state budget.

We have a schedule in place to pay down this debt in the future, but meeting these obligations will remain a challenge. Thankfully, we now have a plan in place that will prevent this kind of crushing burden from ever being placed on taxpayers again.