SB 1 Would Make Young Workers Pay for Politicians’ Mistakes

Stephen Herzenberg
Publication Date: 
September 30, 2015

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Gov. Wolf has indicated his willingness to modify pensions for future Pennsylvania public sector workers by using a variant of the “stacked hybrid” design proposed in 2013 by Pottsville Republican Rep. Mike Tobash. Negotiations of a compromise pension deal, however, remain stalled because Senate leaders remain committed to their own redesign of Pennsylvania pensions, SB 1, passed by the legislature at the end of June but vetoed by Gov. Wolf.

One criticism of SB 1 has been that, even with improvements proposed by Senate leaders, SB 1 would cut benefits by up to two thirds for career workers. This would leave three of six career workers examined by the actuary for the school employees’ pension with annual benefits of less than $10,000.

This brief offers a new perspective on the adequacy of SB 1’s benefits by comparing them to (a) those provided by typical private sector 401(k) plans; and (b) other public sector benefits across the country.

While private 401(k) plans have their own problems in terms of retirement security – in part because of their low returns and high costs -- SB 1 would do even worse. In fact, SB 1’s benefits would be about 15% to 16% lower than with a typical private sector 401(k). SB 1 achieves benefits even lower than many private 401(k) plans for a simple reason: a substantial portion (36% to 40%) of the contributions to SB 1 retirement accounts are forced into “cash balance” accounts that, by design, deliver low returns for the employee. This allows the pension systems to skim excess returns (over and above the amounts credited to employees’ accounts) to help pay down the state’s unfunded pension liability. In effect, SB 1 steals from younger workers to pay down unfunded liabilities that resulted from policy mistakes made by politicians since the early 2000s.

Retirement benefits under SB 1 would also be low compared to other public sector plans. In fact, we find that SB 1 would give future, young Pennsylvania school and state employees THE lowest retirement benefits of ANY large public sector plan in the nation.

Despite artificially repressing returns to young employees’ CB retirement accounts, SB 1 does not save significant funds with its new pension plan redesign. SB 1 savings come instead from reducing benefits for existing employees, partly in ways that may be ruled unconstitutional by the courts.

The lack of savings from pension plan redesign for new workers under SB 1 reflects two factors:

  • Pennsylvania’s pensions for new workers are already dirt cheap as a result of the changes made in 2010 – less than 3% of salary for the biggest pension plan which covers school employees (the Public School Employee Retirement System (PSERS));
  • the inefficiency of the new SB 1 DC and CB savings accounts, which results from their likely low returns and, for DC accounts, high costs. By stealing from young, new employees, SB 1 provides them with low benefits; but, the actuaries for Pennsylvania’s pension systems found, SB 1 pension plan redesign does not steal enough to produce meaningful savings for taxpayers. 

College-educated public employees in Pennsylvania, including teachers and public agency professionals and managers, already have salaries that are more than 25% lower than private-sector employees with the same level of education. Making pension benefits inferior to the private sector as well would make it difficult for schools and state agencies to attract and retain high-quality and experienced staff. Non-competitive compensation is also likely to require higher wages in the future than with the existing DB pensions, another taxpayer cost.

In sum, SB 1 is a “three strikes and you’re out” pension proposal – harmful to public employees, taxpayers in the long run, and to schools and state agencies as employers. On policy grounds, SB 1 should be a non-starter.

Read pension primer #14