A PRIMER ON PENNSYLVANIA’S PUBLIC PENSION PROBLEM
Q: What is the problem?
A: Current and future taxpayers are saddled with a gigantic debt from past services, which is labeled as the unfunded accrued liabilities (UAL) of the State Employees’ Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS).
Q: How much is the debt?
A: Measured by actuarial principles, the collective UAL of SERS and PSERS is near $63 billion based on their most recent valuation reports. (12/31/15 for SERS and 6/30/15 for PSERS.) Measured by economic principles used by credit rating agencies the debt is well over $130 billion.
Q: What are the consequences of that debt?
A: Besides the continuing downgrade of the Commonwealth’s credit rating and the drag on the state’s economic growth, it is likely that all pension fund assets will be fully depleted in the next 10 to 20 years, with 15 years being a very likely estimate of D-Day (Depletion Day). When D-Day arrives, all payments to retirees will be on a pay-as-you-go basis (what actuaries call PAYGO) and will have to come out of the general fund, consuming 40 percent or more of general fund revenues in perpetuity.
Q: How did the debt problem happen?
A: The biggest part of the problem is insufficient funding. Beginning in 2004 and every year since, taxpayer dollars have been diverted from properly funding the pensions to other uses in the budget. Effectively, pension monies were treated as loanable funds where the borrowed money was used by state government for other purposes and the debt was placed on future taxpayers.
Q: How can the problem be solved?
A: The only way any debt problem can be solved: pay it off.
Q: Over what time frame should it be paid off?
A: While federal law requires shortfalls of non-public pensions to be paid off in no more than 7 years, the 2014 Blue Ribbon Panel on Public Pension Funding commissioned by the Society of Actuaries recommends no more than 20 years of level dollar funding for retiring the UALs of public pensions. This would closely approximate the years until retirement for the average state employee.
Q: What will this cost taxpayers?
A: About $7 per year for 20 years, which includes keeping current with newly earned benefits. It is an immediate increase of about $2 billion from the amount contributed by the state and school districts in the 2016 fiscal year.
Q: Are there good reasons to follow the Blue Ribbon Panel’s recommendation?
A: Well, it’s the right thing to do.
It would also be compliant with the PA Constitution’s prohibition on debt.
It would put an end to intergenerational theft.
It would almost certainly end the downgrades on the Commonwealth’s credit rating and might well result in upgrades.
It would reduce the severe economic impact on Pennsylvania’s future, including the drain of people and capital that occur due to the harmful effects of a debt that is compounding at 7.5 percent per year.
Was it mentioned? It’s the right thing to do.
Q: Are there any good reasons not to follow the Blue Ribbon Panel’s recommendation?
Q: But how will we come up with the increased pension payments?
A: Either through new revenues or re-directed current revenues or a combination. That is an issue for the appropriations/budgeting process. Unpaid expenses from the past ought to get priority over new expenses for the future.
Q: But isn’t the pension debt just too big to deal with and will always be with us?
A: No. “Too big to deal with” is what an ostrich says before sticking its head in the sand. The size and harm of the debt are imperatives for paying it off sooner, without delay.
Its economic impact will cripple the future of the Commonwealth if it is not effectively addressed now.
Q: But isn’t the debt only operative if every public sector employee retires today?
A: No. This is a falsehood concocted by those who don’t want to admit there is a problem. Since that event is near zero probability, they think by extension the UAL is a problem with near zero probability. In fact, the UAL is the value of benefits already earned for future payouts, which exist whether or not people retire today. It is the amount of assets needed today to cover the future payouts that have already been earned.
Q: But isn’t the unfunded liability just like a mortgage and we can simply re-finance it?
A: No. It’s very different from a mortgage. Most mortgages are fully funded; that is, there is an underlying asset, a property, worth more than the liability being paid off. The pension UAL is, by definition, an obligation without an underlying asset. If someone had a mortgage but no property, well, I think they would have to admit something was pretty significantly wrong. Just being upside down on a mortgage is a pretty dire financial condition and the pension UAL is 100 percent upside down.
Q: But isn’t Act 120 working and we just need to give it more time?
A: No. The absurdity of growing a debt before beginning to pay it down was the “logic” of Act 120. In fact, the debt has grown larger than was predicted in 2010. A big aim of Act 120 was simply to reduce funding for pension systems already greatly underfunded.
Q: But can’t we solve this debt problem or at least contain the situation by changing plan design for new employees and even current employees going forward?
A: No. Even if we could somehow eliminate all future benefits earned by current and future employees, the problem is still with us and still growing at 7.5 percent per year. While a better designed plan for new employees that reduces liabilities on future taxpayers is good policy, it will do nothing to address the current problem.
Q: But we really can’t afford to pay it off right now, can we?
A: If we can’t afford to pay the debt down now, when will we be able to? The debt is growing at 7.5 percent per year and will only get more difficult to tackle in the future than it is now.