New Castle News


May 29, 2014

Our Opinion: Pennsylvania must make adjustments to costly fund

NEW CASTLE — A looming $1 billion hole in the Pennsylvania budget may force lawmakers to take a closer look at pension reform.

And if changes are made — something that’s becoming pretty much a necessity — we expect to see a so-called “hybrid” pension system for commonwealth employees.

While specifics can vary, this system would keep today’s defined benefit plan for current employees. Those hired in the future, however, would be covered by a program akin to a 401(k) individual plan, where benefits are determined mainly by what workers put into it.

Over time, this change would reduce the burden the existing system imposes on taxpayers. The latest actuarial study of the hybrid system indicates it would save billions of dollars.

However, the immediate savings would be non-existent.

For lawmakers looking for a quick fix to their budget woes, that fact should not deter them from pursuing a hybrid plan. Nor should any complaints that a two-tiered system would be unfair to future employees. The fundamental problem with pension costs continues to grow.

Pennsylvania has a remarkably generous pension program for employees. It’s mainly a consequence of the Legislature crafting a cushy pension system for its members.

When other state employees saw the results, they demanded similar treatment. And with no consideration given to taxpayers, the politicians gave it to them.

That’s the problem with defined pension plans. They guarantee a payout regardless of how much money a pension fund earns in its own right. When investments fail to produce, it’s up to taxpayers to cover the shortfall.

And because of Pennsylvania’s pension payouts, the burden on taxpayers never ends.

Gov. Tom Corbett has been pushing pension reform in fits and starts. So far, he has gotten nowhere — in part because he advocated changes to existing pensions. The dubious legality of that move posed significant problems.

But now the governor is showing interest in this hybrid plan, supporting legislation to allow it.

Legally, the plan should pose no problems. Future employees will know going in that they won’t have a guaranteed pension and will instead be responsible for determining their own retirement savings. That’s what happens with many employees in the private sector today.

Yet as we noted, this change will not immediately impact Pennsylvania’s budget shortfall. And existing pension commitments — along with other expenses — have to be met.

Our concern is that the Legislature will ignore the pension issue and limit its actions to immediate budget matters. Lawmakers need to keep the short and long term in mind this year.

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