All across Pennsylvania, homeowners are facing property tax increases or potential reductions to services like police protection in response to a single cost driver facing local governments and school districts: the spiraling cost of meeting pension obligations.
No longer is there a question of whether these pensions are placing a crushing burden on our cities, counties, townships and school districts. Elected officials—Democrats and Republicans alike—have made it clear that the elaborate pension plans granted to public employees, specifically defined pension plans that guarantee a set retirement benefit regardless of economic fluctuations, are placing a crushing burden on our cities, counties, municipalities and school districts.
At the same time local officials are crying “uncle,” property taxpayers are as well—unable in these economic times to shoulder annual increases in their tax bill. The time has come to truly reform our costly pension systems rather than kick the can down the road as past legislatures have.
Traditional pensions—also called defined benefit plans—place the investment risks associated with market fluctuations on the taxpayer instead of the employee. If the stock or bond markets tumble, it shrinks the amount of money available to pay current pensioners—and requires the state or other government entity to make up the difference. That requires two equally unappealing choices: requiring more from taxpayers or cutting essential services.
The Bureau of Labor Statistics reports the average annual wage for a state government employee is now $48,742, versus $45,155 for workers in the private sector. Since 2001 the cost of benefits for state and local government workers has risen 50 percent more than those for private-sector employees. Those benefits come directly from taxpayers.
The result of these pensions at the state level is astounding. Currently, our public employee state pension plans are under-funded by an estimated $30 billion, and meeting this funding shortfall is a crisis that will affect all budget expenditures, including those that help the most impoverished. It is estimated another $10 billion shortfall exists in non-state government public employee pension plans as well.
I have been working on very complex legislation to be introduced this spring that will require all new state employees and those hired by school districts to participate in a defined contribution plan (like the 401k-style plan that is prevalent in the private sector) where the taxpayer would be required only to match the employee’s contribution. This would be in lieu of the traditional defined benefit pension plan.
Under my plan, workers would own their retirement accounts, and can even carry them to another job. And no longer would taxpayers be responsible for paying for market fluctuations over which they have no control. Instead, the employee would be responsible for the investment strategy they wish to follow, including the amount of risk they wish to take.
Another added benefit to this change would be that future legislatures are prevented from tapping pension money to pay for other government spending as they have done in the past, which has also contributed to the current underfunding.
As for taxpayers, my reform would dramatically cut state and local pension liabilities so those who pay property taxes would no longer be tapped even if the stock market declines—because taxpayers have no more money to give.