As GOP lawmakers ready a new “three-way hybrid” pension bill, the Keystone Research Center released a report that shows that the bill would not generate meaningful savings for the state, but would deeply cut retirement benefits for future employees.
HARRISBURG – As GOP lawmakers ready a new “three-way hybrid” pension bill, the Keystone Research Center today released a report that shows the bill would not generate meaningful savings for the state but would deeply cut retirement benefits for future employees.
The report draws on studies of the three-way hybrid by four actuaries transmitted yesterday to lawmakers with a cover memo by the Independent Fiscal Office (IFO). The report finds:
- The hybrid plan would cut retirement benefits for future school and state employees by at least 15 percent for all hybrid choices and career trajectories examined, by a third or more on average across all projections, and by 50 percent or more for employees choosing the option of a straight 401(k)-style Defined Contribution (DC) savings plan.
- The three-way hybrid does not save meaningful amounts of money. Even without considering reasons the hybrid will increase costs, the plan reduces the “normal cost” of retirement plans for new employees by less than a percentage point across the two pension systems and saves an amount equal to less than half a percent of Pennsylvania’s unfunded pension liability.
- Over the 12-32 year time frame over which projected savings materialize (there are no savings for the first dozen years according to the actuaries), the three-way hybrid is likely to increase costs by more than the projected savings for each of three separate reasons:
- To attract and retain great future employees after the hybrid benefit cuts, schools and state agencies will likely have to raise wages for the college-educated employees whose salaries and benefits already trail comparable workers in the private sector.
- After the elimination of early retirement options and reductions in pensions, many long-service employees will likely retire five to 10 years later, increasing the average salaries of school districts and state government.
- Aging of the pension obligations of the current Defined Benefit (DB) pensions (a result of roughly halving future workers’ DB pension on average) could require more conservative investment approaches, lowering investment returns and increasing taxpayer contributions.
- The cuts in retirement benefits will likely exacerbate an emerging teacher shortage in Pennsylvania. A new study finds that teacher pay in Pennsylvania already trails pay for comparable private employees by 10-15 percent.
Underlying the benefit cuts without meaningful savings that would result from the three-way hybrid is a basic flaw with DC savings accounts that the legislature (and most editorial boards and members of the media) keep ignoring: individual accounts deliver lower returns and have higher costs, as the IFO and both pension system actuaries each recognize in their modeling.
“The legislature is focused on avoiding financial market risk and the possibility of higher future costs,” said Stephen Herzenberg, economist and executive director of the Keystone Research Center, “but the three-way hybrid would guarantee higher future costs. It’s a cure that’s worse than the disease.” Even if investment returns for Pennsylvania’s DB pensions fall significantly short of their projections, the actuaries found, the savings for the state would be under 1 percent of the pension system’s current unfunded liabilities.
“It is past time for the Pennsylvania legislature and media to stop ignoring the inefficiency of DC savings accounts,” added Herzenberg. “It is time for the legislature to move back to the direction it started down in 2010: to reduce taxpayer financial market risk within a DB framework. That can give the state and taxpayers efficient retirement plans with predictable costs.”
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