The slow road to state pension reform – Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From Pensions & Investments

Pennsylvania, like many other states, is facing a huge unfunded pension deficit in its defined benefit plans: a $70 billion shortfall in two large plans for teachers and other state employees. Unlike most states, Pennsylvania in early June passed — with widespread bipartisan support — major legislation “to get real meaningful pension reform,” as Gov. Tom Wolf was quoted saying.

Indeed, the recent Pennsylvania law is a significant step in the right direction. However, the financial projections for the legislation show how long it takes, given the legal and political constraints, for this approach to pension reform to meaningfully reduce the burden on state budgets.

Here is the background. In 2001, Pennsylvania reported a $20 billion surplus in its two big defined benefit plans – the Public School Employees’ Retirement System and the State Employees’ Retirement System. But then state legislators boosted benefits for current state workers without increasing contributions to these plans, and even extended this giveaway to already retired public employees. In 2003, legislators compounded the state’s funding challenge by taking a “pension holiday” — decreasing pension contributions to allocate revenue to other state priorities.

These actions contributed to a giant shortfall during the global financial crisis, when the value of the state’s pension portfolios plummeted. In response, state legislators in 2010 reduced pension benefits — only for newly hired state workers — to pre-2001 levels. Nevertheless, because of growing obligations to current and retired workers, the state’s contributions to its pension plans ballooned to $6 billion in the 2018 fiscal year from $1 billion in the 2011 fiscal year.

Read More »