Second phase of pension reform commences

Second phase of pension reform commences

On July 1 the transition to new pension benefits for the Public School Employees’ Retirement System (PSERS) took effect.  Under the terms of Act 5 of 2017, new hires will be placed into a default hybrid pension plan (class T-G) or can opt-in to a different hybrid plan (class T-H) or a pure defined-contribution plan (DC).

From 2009 to 2018 eight states, including Pennsylvania, created hybrid plans (with components of defined-benefit and DC pensions). We have advocated for placing new public sector hires into DC plans.

The June 30, 2018, actuarial valuation shows PSERS is 56.5 percent funded, with $58.3 billion in assets and $103.1 billion in liabilities.  As we noted in a 2017 Policy Brief, improved funding health for PSERS is at least a decade away under recent projections.

So what happens in the meantime? For fiscal year 2019-20, the actuarially determined employer contribution rate (state and school entities) is 34.29 percent, which equates to $4.8 billion statewide. That is an increase over the previous year’s contribution rate.

School districts receive a minimum 50 percent reimbursement of retirement cost from the state. In 2014-15, when the contribution rate was 21.40 percent, Allegheny County’s 43 school districts received $124.1 million.  In fiscal year 2017-18 the rate grew to 32.57 percent and the districts received a total of $199.1 million.  The amount school districts put in also has to grow, which can lead to property tax increases.  Several Allegheny County districts that raised taxes for 2019-20 noted the higher contribution rate as a reason for some or part of the increase.

What options will new hires select? According to a PSERS presentation, a July 1 or later hire with a $40,000 starting salary receiving annual pay increases of 3 percent and working for 35 years would receive a total retirement benefit of $861,721 in class T-G compared to $758,243 in class T-H and $748,243 in the DC plan.  We noted in that same Brief that “forecasts assume most employees will choose [class T-G].” 

That is what occurring with the State Employees’ Retirement System (SERS), at least in its infancy. The arrangement is identical to PSERS for new hires.  Data from the first three months of 2019 show that new SERS hires overwhelmingly stayed in the default hybrid (A5) or chose the second hybrid (A6) over the DC plan—1,900 to 36. 

Existing employees of SERS were given a window of time to leave their defined-benefit pension plan and join one of the new options.  Only 70 did (SERS has over 103,000 active members) with 65 choosing the DC plan. Of the 218 members of the General Assembly that take pension benefits only 20 switched away from the defined-benefit plan with all choosing to enroll in the DC plan.