Starting in 2018, Pennsylvania government employees will have more options for saving for retirement, in the wake of a sweeping new pension reform law.
The new law, which took effect upon signing by Gov. Tom Wolf (D) on June 12, places almost all state government employees in a hybrid public pension program, with half of their pension benefits coming from taxpayer funds and half from employee contributions.
Government employees hired after January 1, 2018 will choose whether to participate in the hybrid plan, which combines elements of both defined-benefit pension plans and defined-contribution plans, or a new fully defined-contribution plan similar to 401(k) retirement savings plans enjoyed by private-sector workers.
Also in 2018, current government employees will have the opportunity to transfer from the hybrid plan to the defined-contribution plan.
Relieving Taxpayer Risk
The new law lifts a big weight from taxpayers’ shoulders, says, the bill’s author, state Sen. Jake Corman (R-Centre County).
“The biggest component of the bill is that over 50 percent of the risk that the taxpayers now hold in the current defined-benefit plan is going to be shifted off,” Corman said. “By moving to a defined-contribution plan, even a hybrid where there’s a combined defined contribution/defined benefits plan, it begins to shift the risk away from the taxpayers.”
Most private-sector workers have what the new law makes available to public-sector employees, Corman says.
According to the U.S. Department of Labor’s December 2016 report Beyond the Numbers: Pay & Benefits, more than 74 percent of all surveyed private-sector employees have access to one or more defined-contribution pension plans.
“This is basically a 401(k) type of system that almost all private-sector employees already have,” Corman said.” “It’s been part of their [private sector workers’] retirement plans for a decade or so. This is basically the government coming into line with where the private sector went a long time ago.”
Defusing Pension Debt Bomb
Corman says the government had been asking taxpayers to take on too much risk, and it was important to solve that problem before the big bills started coming due.
“The reason we’re in this position, and the reason we’ve had skyrocketing contribution increases, is because we lost $30 billion in value to our two funds in 2008,” Corman said. “Because the taxpayers were holding all the risk, they had to come up with contributions—and that’s taxpayer dollars—to pay it off. By putting this plan into place, you’re assuring yourself that you’ll never have to go through this problem again.”
Reforms Now, Benefits Later
Bill Bergman, director of research at Truth in Accounting, says the new law won’t immediately solve the state’s pension problems.
“The reforms may shift some risk away from taxpayers, but it will take a decade or two for any of that to really take hold,” Bergman said.
Pennsylvania taxpayers need to remain vigilant regarding pension issues even after the new law takes effect, Bergman says.
“Citizens and taxpayers will share a common but sometimes conflicting interest, with new hires and retirees, in the financial integrity of the plan,” Bergman said. “The need for truthful and timely financial reporting will only get more important down the road.”