In Pennsylvania, even more than most U.S. states, we cope with today’s troubles by repealing the 20th century and retreating toward the past.
Since the 1920s, working for the state or teaching in its public schools has included a guaranteed pension. This week, state Senate leaders plan to ask Gov. Corbett and the state House to end that guarantee for future hires.
State retirement used to mean a modest pension in line with what big employers used to (and increasingly don’t) provide.
Indeed, the average state or school retiree collects a yearly pension of $24,000 That’s a comfortable boost to savings and any Social Security a worker may have accrued in the private sector, especially for those workers who also get retiree health; but it’s not so much that it ought to threaten the future of government, if the funds had been managed like a household or business.
But in 2001, then-Gov. Tom Ridge, backed by Democrats and Republicans, approved a goofy policy that significantly increased future pensions, especially for lawmakers, while cutting taxpayer pension "contributions."
While aged former teachers still collect small pre-reform pensions (and get no cost-of-living increases), new retirees earn more; around 700 of the state’s 300,000 public retirees now collect over $100,000 a year; large pensions will increase as assistant principals and state college football coaches and other well-paid veterans retire. Even when pension eligibility for new hires is trimmed, as it was in 2010, Pennsylvania judges — future pensioners — decline to cut benefits already promised and negotiated for current workers.
Instead of loudly objecting, the politicians and political appointees on the state pension boards voted to invest boldly in private venture, hedge, buyout, real estate and commodity funds, in hopes of supplementing old-fashioned bonds and stocks.
These investments have been highly lucrative — for the private money managers, some of them past political contributors, who collected $700 million in fees last year for running state pension money. The funds say these private managers have also, on the whole, been more profitable than stocks and bonds. It’s a hard claim to verify, since they won’t tell us what’s in these private funds, which won’t actually deliver profits for years, in many cases. But even the profits they claim haven’t been nearly enough to keep up with increases in what the pension plans owe.
Worse, the pension plans, advised by consultants who function as champions of private investment contracting, set unrealistically high investment targets; that made it easier for the government to cut funding in fat years.
The predictable (and much-predicted) result is a growing gap between what the pension plans own, and owe. Even with public workers now paying 6 percent to as much as 12 percent of their paychecks into the funds, the state projects taxpayers’ share of the deficit will more than triple in the next four years.
Since pensions are a leading school expense and voters aren’t in a mood for higher taxes, three-quarters of Pennsylvania school districts have stopped hiring or are furloughing staff, according to data cited last week in a report by Moody’s Investors Service analyst Shannon McCue.
"The real solution," retired Philadelphia public schoolteacher David Marder tells me, would be to reset pensions at pre-2001 accrual rates and cap higher payouts "to restore sanity."
But as deficits grew, Harrisburg couldn’t agree on going back to the ‘90s. So now Senate leaders, led by majority chief Sen. Dominic Pileggi (R., Delaware County), are reaching further back, drafting plans to end guaranteed pensions for future hires.
The senators will still get their pensions. And this won’t fix the current deficit — they’ll probably push payments further into the future, acknowledges Pileggi’s policy director, Erik Arneson — but it may keep the deficit from swelling.
The plan would still set aside many millions for future retirees. But it’ll be up to the workers to invest that money — 401(k) or 403(b) style, pleasing private financial advisers, who hope for a cut — while eating losses if they fail to guess which way markets turn.
Business does it; government should too, says Sen. Pileggi.