We are almost at the end of the PSERS story. If you are new to the Blog, you should start at the beginning of the series, here.
We have previously established that, as of 2013, PSERS had a shortfall of $32.6B between benefits promised and funds in the plan. And, according to PSERS itself, the causes of this shortfall were:
- $14.0B – Employer Funding Deferrals
- $9.0B – Investment under-performance
- $8.9B – Unfunded Benefit Enhancements
- $0.8B – Divergence between experience and actuarial assumptions (demographics, salaries, etc)
There are really only two pockets from which the needed funds could come — from the plan participants, or from employers. How might we decide how much each party should contribute to the solution? How about in proportion to the funding gap each side caused? Thinking about it this way, I would assign $$ as follows:
- Employers: $14B in past under-contributions
- Participants: $8.9B in benefits awarded to members, beyond what was possible given their prior contributions
- Joint Responsibility: $9.0B in market losses / under-performance, and $0.8B in actuarial issues. (Pro-rate to each party based on direct share)
- Employer Share = $19.9B (61%)
- Participant Share = $12.7B (39%)
Not surprisingly, my method for assigning responsibility was not how the state solved the problem. In 2010, the State of Pennsylvania enacted Act 120, which did not touch benefits for existing participants or for retirees, but did enact a new lower benefit tier for new employees hired into the system. Approximately 13% of active PSERS members are now under this new, lower, benefit tier. In addition, the state decided to dramatically raise employer contribution rates, phasing them in over several years.
So the State’s solution puts the entire burden of rescuing the system on the employer (local school districts), and participants were not asked to make any sacrifices. While I know it is always difficult to ask retirees to cough up money, it is actually quite easy to go back to 2001 and see which participants subsequently received ‘enhanced benefits’ that were never paid for and take pension checks back down to where they would have been had Act 9 never been passed. Perhaps that is political suicide for lawmakers, but it would have been a fair step to take.
Instead employer contributions have escalated since 2011. And will keep going up until 2020.
Although several lawmakers continue to advance and advocate for new pension reform proposals, none have made it out of committee. So at UCFSD we had better plan for a sharp escalation in costs.