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Special Report: Pennsylvania Pension Crisis III

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By William Ecenbarger

It is politically fashionable to blame the pension mess on the dismal state of the national economy in general and the precipitous drop in the Dow Jones average in particular.

But the Pew Center on the States said in a new study that the economy and the stock market isn't the major culprit in the $1 trillion difference between what the 50 states owe their workers and what they have set aside to pay those obligations.

"Recessions and investment losses played smaller roles in the creation of this problem," said Susan K. Urahn, the center's managing director. "To a significant degree, the $1 trillion gap reflects states' own policy choices and lack of discipline."

In Pennsylvania, as elsewhere, the sorry history of pension plans for state and local government employees has been "promise them anything" -- either to attract good workers or to placate aggressive public employee unions. Since the bill for these perks won't come due for years, the feeling is: Let the next governor, mayor, legislators, city councilmen or school directors worry about the long-term consequences of this profligacy.

Political leaders abhor the idea of suggesting to their constituents that they make a sacrifice today to protect the next generation.  They would rather pile on the debt.

The result is that retired teachers and government workers enjoy far more generous pensions and medical benefits than most of the taxpayers who finance them. Nine out of every 10 government retirees have defined benefit plans that pay them a goodly portion of their final salaries as workers.

 

Pay as you go

By contrast, only about one in five private sector retirees have defined benefit plans. The rest of them either have no retirement plans or defined contribution plans, such as 401k's, that limit the employer's obligation to a making set contribution and no more than that. The value of the plan - and the amount it will provide the employee in retirement - is not the employer's concern.  

In contrast, the defined benefit plans used by government must pay amounts determined by the employee's length of service, compounded by a multiplier - which equals 2.5 percent, in many cases. Under this formula, an employee who works 30 years is entitled to 75 percent of their final pay.

Edward Inghrim, a member of the Saucon Valley School Board in Lehigh County, recently put together some numbers using the current teacher contract for his district.

 "I assumed a teacher hired at age 24 at $40,000 would work 30 years and get an average pay increase of 4 percent a year and contribute 7.5 percent of salary to the state retirement system. Retiring at 54, the teacher's total pension contribution would be $168,255.

"Assuming the teacher lived to 85 and got health benefits until Medicare eligible, he or she would collect about $3.4 million after retiring. Not a bad return. If the annual raise were 5 percent, the teacher would get a return of $4.2 million on an investment of $199,317."

Perhaps the most disturbing aspect of the pension crisis is that it is a recipe for class warfare. The 500,000 or so retired public workers are enjoying benefits that private-sector Pennsylvanians are providing by paying higher taxes and working additional years.

Retirement benefits for most non-public Pennsylvanians hang on the fate of the economy. If their employers ever did offer defined pensions for life, the odds are that they have stopped or will do so shortly. In the private sector, these plans are dinosaurs, dying out quickly.

Pennsylvania, like the rest of America, may be dividing into two hostile camps -- one that is enjoying ever-steady retirement benefits guaranteed by law for life, the other faced with working well beyond Bismarck's benchmark of 65 to pay for those benefits.

 

Class warfare

Susan Mangiero, president of Investment Governance, Inc., a Connecticut research firm, says we are headed toward a "huge showdown" between taxpayers and public employees. "The anger is more acute today when people are feeling economic hardship," she says. 

Theoretically, the state and local governments have three ways to approach the crisis: Option 1 is to slash retirement benefits; Option 2 is to pursue risky, high-return investments, and Option 3 is to raise taxes sharply.

Most authorities say that state law prohibits any reduction in benefits to retirees. Devil-may-care investing seems especially unwise because not only might it not work, but it could make a horrible problem even worse if it backfired.

That leaves the taxpayers, and the only thing standing in the way is the well-documented political cowardice of elected officials interested in becoming re-elected officials.

However, there is what we might call Option 3-1/2, which is to borrow money. Along these lines, Gov. Ed Rendell has proposed a refinancing that would ease the pain for taxpayers by spreading pension liabilities over the next 30 years. (Even with spreading out the debt, the Rendell plan still calls for sharply high pension fund contributions by the state in the next five years.) In other words, the bill will be paid by our children and grandchildren.

Still, this option may have great appeal in the Legislature in an election year. Pass on the problem to the next generation, whose votes you won't need this year.

That was the philosophy back in 2003 when it all began. Many of the lawmakers who voted for that delay won't have to face irate voters next Nov. 2.

For example, there's Sen. Robert Mellow, a Lackawanna County Democrat who is retiring after 40 years in the General Assembly. He'll be enjoying the fruits of retirement, including a lifetime annual pension that could go as high as $313,000 - for life.

                                                                             

 

Bill Ecenbarger is a veteran journalist and a regular contributor to Metropolis.

 

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