There’s a bizarre sense of deja vu in the halls of the Capitol.
In 2013, Republicans refused to pass then-Gov. Tom Corbett’s pension plan, citing an eye-popping price tag and the fact that it was unconstitutional. Now, strangely, Republican leaders are dusting off the same plan that they already rejected.
The details are still in motion, but Senate Majority Leader Jake Corman has outlined a proposal that will cut benefits for current workers and move new workers into 401(k)-style individual savings accounts. It’s true that Pennsylvania needs to manage its pension debt, but this proposal makes things worse, not better. It wasn’t the answer in 2013, and it isn’t today.
Closing a pension plan and moving to 401(k)-style savings accounts doesn’t save taxpayers money — it actually costs them more. It’s like a credit card. Just because you get a new credit card doesn’t mean the $53 billion debt on the old card goes away. In this case, the debt on the old card will actually grow.
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How much will pension debt grow? Independent actuaries studied the Corbett plan and found that the switch to a 401(k)-style plan would cost taxpayers $42 billion in transition fees. Even if the cuts in benefits for existing employees in Corbett’s plan had been enacted and survived court challenge — which Senate Republicans decided in 2013 was not worth the risk — the overall proposal still would have cost an estimated $22 billion.
While the American Enterprise Institute’s Andrew Biggs has challenged the claim that transition costs would be large, he acknowledges that a smaller share of pension assets would go into riskier assets (e.g., stocks) as remaining plan members all age — which lowers returns. Biggs also ignores a separate reason 401(k)-style accounts are a bad deal for taxpayers: They have lower returns and higher financial costs than pooled, professionally managed pensions.
Despite the claims of some opponents of public pensions, pension benefits are not “golden parachutes.” Pensions are deferred compensation toward which Pennsylvania’s teachers, nurses, corrections officers and thousands of other workers contribute, on average, 7 percent of every paycheck. If the legislature cuts current worker benefits, that’s equivalent to taking back wages; from a legal point of view, it’s a breach of contract — and contracts are protected by the Constitution. Any legislation that cuts current worker benefits would, at minimum, be subject to a lengthy litigation process, another drain on taxpayers.
Public servants never missed a payment into the pension system. Legislators and several governors, on the other hand, chose year after year to invest less than the required amount — creating the pension debt we have today. The answer cannot be to break the promise we made to the commonwealth’s public servants, and to do it in a way that costs taxpayers more, not less.
Gov. Tom Wolf’s plan would put our pensions on a path to fiscal sustainability. He aims to cut $200 million out of $700 million in annual fees now received by Wall Street investment firms for managing pension assets, and he also borrows Republican state Rep. Glen Grell’s proposal for a small pension bond. So that bond repayment won’t come out of current funds, Wolf would dedicate to this purpose revenues from modernizing the state liquor stores to better serve customers.
Even before the Wolf plan, Pennsylvania was approaching the point at which pension payments will stop increasing substantially each year. With the Wolf plan, Pennsylvania and its school districts would accelerate toward the growing light at the end of the pension tunnel, and be able to focus again on schools that teach and government that works. The last thing we need is a plan that extends the pension tunnel and takes more years to reach the light.
Legislative leaders have said that we can’t enact a sensible budget that works for working families until we enact their pension overhaul. That’s a false choice. Pennsylvanians made it clear — in the last election and in recent polling — that their priorities are funding our schools and strengthening our economic recovery to create more good jobs. Nowhere on that agenda is gutting retirement security for public workers, and doing it in a way that puts Pennsylvanians in even greater debt.
It’s time to put the Corbett pension plan to rest and focus on real solutions for the commonwealth.