Forty-one billion dollars: It is a number that boggles the mind.
Yet that is the gap separating the value of the assets held by Pennsylvania’s two public pension systems and the benefits it will eventually have to pay out to current and future retirees. And unless something is done right now, that amount and the crushing burden it will place on taxpayers and local school districts is going to grow. This pension crisis is now the biggest, single threat to the state’s long-term fiscal stability and potential economic growth.
To put the $41 billion in perspective, Gov. Tom Corbett’s total proposed 2013-14 state general fund budget is $28.4 billion. To put it further in perspective, the funding gap represents a $9,000 tax increase on an average household, according to Pennsylvania Budget Secretary Charles Zogby. As local school districts increasingly scramble to pay their part of the puzzle, residents can expect to see programs cut, teachers let go, and in some cases property taxes go up.
Corbett has proposed a commonsense solution that we support and one that deserves serious consideration by the Legislature. At its simplest, it protects retirees and the benefits accrued by current workers. But it alters future benefits for existing employees and changes the system entirely for yet-to-be hired state workers who would be placed into a defined-contribution system similar to the 401(k) retirement plans used by the private sector.
That works out to a 20 percent reduction for most state employees and teachers and a 17 percent reduction for most legislators.
But that reduction is going forward. For an employee who has already worked 20 years, and retires with 30 years of service, the reduction in actual benefits is actually closer to just 8 percent.
It was a bipartisan agreement between the Legislature and then Gov. Tom Ridge that started the state down this road. A decision was made in 2001 to not only boost pensions for themselves and state workers but to do so retroactively. Both parties then worked together again over the years to avoid dealing with the problem when the recession hit and the stock market dropped.
We’re about to see if both sides of the aisle — who worked so well when it came to giving away the money and then kicked the problem down the road — will come together to make the fundamental changes to the culture of public employment and benefits necessary to bring them in line with our state’s economic reality and the reality of the private sector.
To be clear, state employees who have spent years dutifully paying into the system and meeting their obligations are not the villains of this story. But nor are they victims: 90 percent of them take every dime they contributed back out of the system — with interest — as soon as they retire, relying for their benefits entirely upon state payments.
And public employees must absolutely be part of the solution.
The defined-benefit plan enjoyed by the public sector and a few unionized private sector employees is as foreign to the modern cubicle-dweller as the internal combustion engine would be to a caveman.
And it has to go.
That means all current and future state employees should be moved into the defined-contribution system envisioned by the administration.
With private-sector wages stagnating and costs rising across the economy, there is simply no justification for giving one class of workers access to a retirement system far more generous and more expensive than that made available to the vast majority of workers whose tax dollars are used to support it.
Union leaders, who say they will go to court to fight any changes to the system, argue that such a structure is necessary to lure qualified people into public sector employment. An ironclad benefits package and the effective guarantee of lifetime employment is inducement enough.
Corbett is correct when he says that every dollar spent to prop up the under-funded pension system is one dollar less for public schools, social welfare or infrastructure programs.
The fact of the matter is that state employees who rail against such cuts and then rally to protect their wallets can no longer have it both ways.
It’s time to level the playing field and bow to economic reality.