Analyst: State needs pension reform now
Pennsylvania’s public employees’ pension problem is a growing “toxic” situation that will affect generations if reforms are not made, according to a Pennsylvania Economy League pension expert who spoke Thursday at a local issues forum at the Genetti Hotel.
Richard C. Dreyfuss, a business consultant and actuary who worked for the Hershey Co. for 21 years, said public workers’ pension plans such as the Pennsylvania School Employees’ Retirement System and SERS – the plan for state government employees – are too closely tied to politics.
Defined benefit retirement in those types of plans too often are compared against private-sector plans instead of other public plans and usually are not funded to recommended levels, Dreyfuss said.
He also said that those in government often use “rosy” economic assumptions to minimize current and future costs while postponing to fully fund the plans to “well beyond the average remaining career duration of the current workers.”
“When you put defined benefit plans along with politics, that’s where we have problems,” he said.
Dreyfuss said PSERS owes $109 billion in earned and unearned benefits. Only $58 billion is set aside to pay obligations because the retirement plan is funded at just 60 percent.
“If you turned off the system tomorrow … we would have $88 billion worth of liability,” he said. “That is not a good place to be.”
The PSERS system has a negative cash flow – more money going out than coming in – according to Dreyfuss.
He likened the situation to only paying two-thirds of a mortgage each month and continually applying for a new loan each year.
“This number is getting away from us. It’s a little bit like running uphill,” he said.
Dreyfuss said about 70 percent of the country’s Fortune 500 companies use defined contribution retirement plans because they are more predictable to fund and can cost less than public sector defined benefit plans.
The unfunded liabilities from PSERS don’t include $6 billion in state municipal pensions – such as the city of Williamsport’s – or retired public employees’ health care costs.
Funding those costs will be a huge task, he said.
“I don’t think that bodes well for the quality of life for the next generation,” Dreyfuss added.
Even Act 120 of 2010, which was passed by state lawmakers and designed to help curb the tide of rising liabilities did little, he said.
An actuarial note that accompanied the bill stated that employer contributions to public retirement systems would decrease, resulting in underfunding.
Dreyfuss said the legislation assumes an 8-percent return on investments. However, both PSERS and SERS lowered their estimates to 7.5 percent, which increased liabilities by $6.7 billion overnight, he said.
Act 120 also assumes no benefit changes and cost-of-living increases. “Anybody who says, ‘Let Act 120 work,’ is taking us over the cliff,” he said.
John Engel, South Williamsport Area School District school board president, who attended the forum, said the increasing costs of pensions are unsustainable.
“We just raised taxes because of the pension,” he said. “That’s the sole reason.”
Pension reform must take current funding, predictable and affordable costs into consideration, Dreyfuss said.
“To finally achieve comprehensive and sustainable pension reform in Pennsylvania, we need to adopt both plan design reforms and funding reforms,” he wrote in a recent Philadelphia Inquirer editorial. “If nothing is done, this burden will fall to future generations of Pennsylvanians who will be forced to pay ever higher taxes to government that, because of its pension obligations, will be capable of doing less and less.”