As secretary-treasurer of the Pennsylvania AFL-CIO, it is my responsibility to ensure our funding derived from paychecks of rank-and-file workers serves their best interests. By extension, I feel the same responsibility to hold public officials accountable for the money the commonwealth takes from workers’ and taxpayers’ paychecks to fund government. Gov. Corbett should too.
That being the case, why is the governor proposing a costly new pension plan for public employees when the current plan will cost nearly half as much in the future?
I have looked closely at the governor’s plan, cutting through the political rhetoric and focusing on the arithmetic. And it is clear that Gov. Corbett’s pension math just doesn’t add up.
Gov. Corbett’s pension proposal would create a new defined-contribution plan for public employees and give every new employee a new 401(k)-type account. This proposal will do nothing to reduce the commonwealth’s debt to current pension plans. In fact, ending the revenue stream to current pension plans will produce significantly higher employer costs. That means higher taxpayer costs.
As new employees are forced to enroll in the governor’s 401(k)-type plan, employees who remain in existing pension systems will get older and begin to retire. Employers will then need to pay off all existing debts sooner than presently scheduled, so that money is available to pay benefits. Fund managers will need to shift to less risky and more liquid assets, leading to lower rates of return. This means the state and school districts will have to make even higher contributions to meet their pension obligations.
Pennsylvania isn’t the first state to experiment with this approach. Many of the states that have conducted actuarial studies on shifting to a 401(k)-type system have discovered it is more expensive.
A recent Keystone Research Center study showed more than a dozen states, including Minnesota and Texas, have carefully examined defined contribution proposals similar to Gov. Corbett’s. All those states concluded it was too costly, digging an even deeper hole for taxpayers.
States that have actually adopted 401(k)-type plans have experienced higher costs. Since closing its teachers’ defined benefit plan in 2005, Alaska has seen the employer portion jump significantly. In Michigan, which began enrolling all new state employees in a 401(k)-type plan in 1997, fund costs and liabilities skyrocketed.
Considering these facts, Gov. Corbett’s plan is far less attractive than he makes it sound. In fact, it makes the current problem worse — for employers, public employees and taxpayers.
The current problem is a $41 billion pension debt, caused when employers failed to make required contributions to the pension systems. This debt is what employers owe for the pensions of current employees.
The pension debt isn’t connected to the cost of pension benefits for new employees, and the governor’s new 401(k)-type plan is focused on new employees. So his plan wouldn’t do anything to address the pension debt.
Paying off the pension debt is a fiscal challenge, but it must be done, it can be done, and it is being done.
Act 120, the Pension Reform Act of 2010, set up a responsible payment plan to clear this debt. Under this law, the employer cost of benefits for new members in the pension systems going forward is only 2.2 percent of workers’ salaries (compared to 4 percent for the governor’s plan), and employees will be paying 77 percent of the cost of their own benefits.
Instead of asking the taxpayers to pay more for less, Gov. Corbett should allow Act 120 to work. That is a much better solution than his plan, which would cost taxpayers more and make the current problem worse.
Frank Snyder is secretary-treasurer of the Pennsylvania AFL-CIO, the state’s largest labor federation representing 57 affiliated unions with 1.1 million members.