Pa. Overhauls Pension Plans for New State Workers, Teachers
Pennsylvania's pension overhaul law goes into effect today for most new state government employees and on July 1 for all new school employees.
Under the law, known as Act 5, the affected new public workers no longer will receive full guaranteed pensions backed by taxpayers and immune to the ups and downs of national and world economies.
The law creates two new retirement plans that carry less risk for taxpayers and therefore lower retirement benefits for workers who enroll in them.
One plan is a hybrid. It puts about half the retirement savings in a traditional, taxpayer-backed fund. The other half goes into a private sector 401(k) that rides the stock market's ups and downs.
The other option lets workers put all their retirement money into a 401(k) account.
"These changes will reduce future risk to taxpayers and Act 5 will result in lower costs overall," said Dan Egan, spokesman for Gov. Tom Wolf's Office of Administration, which handles personnel.
The new pension options will save taxpayers $43.3 million to $140 million annually over 30 years, according to a financial analysis conducted by the Senate.
Retirement benefits would fall 18 percent for new school employees, and 6 percent for affected state workers, compared to employees hired since 2010.
That translates into retirement reductions of $7,327 to $33,173 for school workers served by the Public School Employees Retirement System (PSERS). Benefits would fall $6,452 to $34,048 for new state workers covered by the State Employees Retirement System (SERS).
Those figures are for a 65-year-old who retires with 35 years of service and an average annual final salary of $60,000.
The 401(k) is not free, either.
Future state workers will be charged $24 a year, plus an annual asset fee of 0.07 percent, from the company SERS hired to run the 401(k), according to the contract. That company is Great-West Life & Annuity Insurance of Denver.
Future school employees also will be charged operational fees for their 401(k) accounts through PSERS' contractor, Voya Financial. The Morning Call could not determine annual costs.
Not every new public servant is affected by the law.
Lawmakers, who are sworn into office today for the 2019-20 legislative session, excluded themselves from mandatory participation in the reduced plans when they passed the pension bill in June 2017. Lawmakers also excluded state law enforcement and corrections officers.
Rather, lawmakers gave themselves and all existing employees the option of freezing their old plans, and then opening one of the new plans. Those eligible have until March 31 to decide.
Because the plans are not mandatory for existing elected officials and personnel, they will not lower PSERS' and SERS' combined $72 billion debt taxpayers must pay for pension plans obligated to future workers and retirees.
The debt was caused by three main factors. From the mid-1990s until 2010, governors and lawmakers in both parties decided not pay the employers' full annual share of workers' retirement benefits and they permitted school boards to do the same thing. In that time, lawmakers also gave themselves and all other employees and retirees retroactive pension bumps that sapped assets. Then market downturns crushed those assets further.
It's true the law will not impact the debt, said Rep. Mike Tobash, R-Schuylkill, one of the law's main architects. However, he said, taxpayers will experience less risk of higher debt because the plans are not fully backed by taxpayers.
"It's shifting the risk," Tobash said recently.
Tobash declined to say whether he would drop his fully backed retirement plan for one of new plans, saying he will weigh the personal and political exposure of that decision by the deadline.
There's no chance all or even a majority of the state's 253 lawmakers will line up for the new pension plans, said Barry Shutt, a retired Agriculture Department worker from Lower Paxton Township, Dauphin County, who advocates for lawmakers to pay off the state's full pension debt.
"They are not inclined to do anything to damage their future benefits," Shutt said.
As of mid-November, the state had 72,677 employees, the lowest level since the 1960s, according to the Office of Administration. That reduction is caused in part by attrition. The number of retirements and resignations has been nearly double each year since 2009, records show.
The administration has not forecast how many employees may need to be hired next year, Egan said. But the governor does not believe prospective employees will be scared off by the new retirement options, he said.
"The changes provide some more flexibility for people passionate about public service but prefer a shorter tenure in state government," Egan said.
On Dec. 14, SERS mailed letters to its active members informing them of the option of switching plans, but it's doubtful many will exercise that option, said Joe Torta, the agency's director of member services.
"I'm not anticipating a lot of shifting into hybrid because the current benefit structure is higher," he said.
Still, the law has required SERS to reorganize its operations, Tobash said. Staff rewrote brochures for how the plans work and compare so current and prospective employees can make the best decisions for themselves, he said. It also had to make other changes to ensure the 102 government agencies that are part of SERS file employees' paycheck information correctly.
SERS also got approval to hire 13 more employees to help with the roll out, SERS spokeswoman Pam Hile added.
PSERS also is scrambling to get the new accounts.
"It is an enormous task for us with a very tight deadline, educating all 700 [plus] employers on the new reporting and benefits, updating business processes, computer systems and educating members," PSERS spokeswoman Evelyn Tatkovski Williams said.