DN editorial: Pa. must be honest about future with pension overhaul

BEWARE OF anything that has the word "reform" attached to it. A case in point are the bills being passed nearly every day in Harrisburg, now that the icy relationship between Gov. Wolf and the Republican-led legislature has thawed a bit.

One is a bill to reform the state's pensions systems for state and school employees. Both funds are suffering from long-range deficit - to the tune of nearly $63 billion. There has been a big push (among Republicans mostly) to do away with the state's current pension system - which bases pension on years served and final salary, multiplying the two to create what is called a defined-benefit pension. (Example: An employee who worked for 30 years at an average final salary of $70,000 can retire at $52,000 a year, based on a 2.5 percent multiplier set by law.)

Defined-benefit plans used to be common, but those times are mostly long gone - except in the public sector.

Most private-sector employees get a defined-contribution plan, whereby they open a 401(k) and their employer contributes anything from zero to 4 or 5 percent of their salary as a match to money the employee puts in the 401(k).

The big difference between the two is that the employer bears the risk in a defined-benefit plan. If the employer's pension fund investment tanks, if the state fails to make the needed payments to the fund, the employee is still owed $52,000 a year.

In the defined-contribution plan the risk is on the employee. If you invest unwisely or if the market tanks, as it did in 2008, the value of your 401(k) sinks as well.

Republicans in the legislature have pushed doing away with a defined-benefit system and installing the 401(k) version for new employees, a step that would - in the long run - ease the financial burden placed on the state. Most Democrats want to keep the old pension system in place.

Last week, the House passed a pension reform bill that was a hybrid: new employees would get a defined pension for the first $50,000 of their salary, and a 401(k)-like pension for any salary about that figure. Is this a reform? In a sense, yes - but a small one. Is it enough? Probably not. Critics say the savings offered by this bill are illusory and that it has too many loopholes. The governor likes the bill; Republicans in the Senate do not. Stay tuned to see what the Senate does.

It's important to know that regardless of what "reform" becomes law, it will apply only to new hires. It will do nothing to decrease the $63 billion deficit because that figure is based on what is owed existing employees.

Pension debates are boring, so here's something to wake you up: Who is responsible for paying off that $63 billion deficit? Go the nearest mirror to find out. Or maybe take a selfie.

The legislature and governor have yet to address that looming deficit at all. The day will come when it will have to be paid; even if the repayment is drawn out over decades, it will still cost billions each year. Taxes will have to be raised and programs cut to raise the money.

In the coming weeks, the odds are the politicians Harrisburg will agree on some version of a pension "reform" bill and leave town patting themselves on the back for a job well done.

In the meantime, you - the taxpayer - will be left holding the bag.