PUBLIC PENSIONS IN PENNSYLVANIA:

1
PUBLIC PENSIONS IN PENNSYLVANIA

• A Looming Crisis?

2
HISTORY OF PENSIONS

• Prior to 1950s few people had pensions
• Most worked until they died
• Initial issue company specific or industry-wide?
• Labor wanted industry-wide (but lost)
• G.M. first offered company pensions in 1950
• Set the trend

3
TYPES OF PENSIONS

• Defined Benefit
• Formerly the most common
• Defined Contribution
• Now the most common

4
PA Provides Two Major DB Pensions

• State Employee Retiree System (SERS)
• Most Commonwealth Employees
• Funded by the Commonwealth, Employee
  Contributions, and Investment Income
• Public School Employees Retirement System
  (PSERS)
• All Public School Teachers
• Funded by the Commonwealth, School Districts,
  Employee Contributions ,and Investment Income

5
PA Defined Benefit Plans

• Guarantee a fixed monthly income upon retirement,
  usually for life
• Minimum number of years to be vested
• Amount determined by formula
• Years of service
• Average salary at retirement
• A multiplier

6
Defined Benefit Plans

• Employer has life-long obligation
• The Social Security system provides a form of a
  defined benefit retirement plan

7
Defined Benefit Formula

• Annual Pension Equals
• (Years of Service) X
• (Average Salary) X
• (Multiplier)

8
Defined Benefit Plans

• Years of Service
• Often allow credit for other employment or
  military service
• Allow participants to buy service years

9
Defined Benefit Plans

• Average Salary
• PSERS and SERS use average of highest 3 years
• Extra pay included in the average
• Overtime
• Holiday Pay
• Extracurricular Activities
• Developing Curriculum
• Attending Workshops

10
Defined Benefit Plans

• Multiplier
• Most PA employees have a multiplier of 2.5
• Suppose 35 years of service and an ending salary
  of 80,000 (PS 10)
• Pension 70,000 per year
• Over 20 years the cost is 1,400,000

11
How it Adds UpChanging the Salary
Average Salary Service Years Multiplier Annual Pension Lifetime Costs
65,000 35 0.025 56,875 1,137,500
70,000 35 0.025 61,250 1,225,000
75,000 35 0.025 65,625 1,312,500
80,000 35 0.025 70,000 1,400,000
12
How it Adds UpChanging the Years
Average Salary Service Years Multiplier Annual Pension Lifetime Costs
80,000 20 0.025 40,000 800,000
80,000 25 0.025 50,000 1,000,000
80,000 30 0.025 60,000 1,200,000
80,000 35 0.025 70,000 1,400,000
13
How it Adds UpChanging the Multiplier
Average Salary Service Years Multiplier Annual Pension Lifetime Costs
80,000 35 0.010 28,000 560,000
80,000 35 0.015 42,000 840,000
80,000 35 0.020 56,000 1,120,000
80,000 35 0.025 70,000 1,400,000
14
How it Adds UpChanging the Multiplier
Average Salary Service Years Multiplier Annual Pension Lifetime Costs
50,000 35 0.01 17,500 350,000
50,000 35 0.015 26,250 525,000
50,000 35 0.02 35,000 700,000
50,000 35 0.025 43,750 875,000
15
The Hidden Menace in Multipliers

• There are about 110,000 active SERS members
• If the average salary at retirement is 50,000,
  then Increasing the multiplier from 2.0 to 2.5
  results in an increase of
• 110,000 X 175,000 19.25 billion

16
(No Transcript)
17
Defined Benefit Plans as a Ponzi Scheme

• DB plans are workable as long as there are
  increasingly more workers than retirees
• When Bethlehem Steel went bankrupt in 2001 it had
  7.5 dependents for each worker
• In 1962 GM had 1 retiree to 11.6 workers today
  it has 3.2 retirees per worker
• There are about an equal number of SERS workers
  an d retirees (110,000)
• There are 264,000 active PSERS members and
  168,000 retirees

18
Fewer Defined Benefit Plans

• The Demographics are working against DB plans
• Market realities have caused most private sector
  firms to abandon them.
• Very similar to the problems facing Social
  Security

19
Fewer Defined Benefit Plans
Year Defined benefit plans Defined contribution plans
1985 80 41
1986 76 47
1988 63 45
1989 63 48
1991 59 48
1993 56 49
1995 52 55
1997 50 57
1999 42 52
2000 36 50
20
DB The Funding Problem

• Employee Contributions
• SERS 6.25.
• PSERS 7.5
• Returns on investments
• Expected 8.5
• 1950 05 SP up 7.94 1950 -09 SP up 6.75
• Commonwealth contributions vary
• When returns are low contributions must increase
• In June 2008 the Governor estimated state
  contributions would need to more than double by
  2012

21
Defined Contribution Plans

• Employer and Employee each make a contribution to
  an investment fund
• The usual is a 401(k) plan
• National average employer contribution is about
  3.0 of salary
• Most employees manage their account
• The employer obligation ends at retirement
• George W. Bushs idea for SS

22
Difference in Cost

• The cost of a defined benefit plan can be less
  than, the same as, or more than a defined
  contribution plan -depending on the rate of
  return
• One advantage of the defined contribution plan is
  that the cost can be predicted

23
Three Recommendations

• Gradually shift to a defined contribution plan
• Gradually impose the state and local income tax
  on SERS PSERS income
• Increase the age for full DB pensions similar
  to Social Security