HARRISBURG - Gov. Tom Corbett's public pension proposal includes provisions designed to prevent what officials describe as "excessive" retirement packages by having future pension benefits for state employees and school district employees more closely reflect overall earnings.
Three provisions in House and Senate bills starting in 2015:
- Limit how much of a factor overtime pay in the final years of a career can influence the pension amount.
- Use an annual Social Security threshold to limit the pension income of the highest earning employees.
- Adjust the monthly pension amount when an employee upon retirement opts to withdraw his or her own pension contributions in a lump sum payment.
These proposed changes if enacted would affect future pension benefits that have yet to be accrued by current employees in the State Employees' Retirement System and Public School Employees' Retirement System. Pension benefits already accrued by current employees and pension benefits for retirees aren't affected under the legislation, which faces uncertain prospects in the Legislature despite being on Mr. Corbett's list of priorities. If all three are enacted, it would save state and school district taxpayers an estimated $5.7 billion during the next 30 years, according to the state budget office.
The above provisions aren't drawing as much attention as other parts of Mr. Corbett's proposal to put new employees in both systems under a 401(a) defined contribution plan, similar to 401(k) plans in the private sector, instead of the traditional defined benefit plan, and to calculate unaccrued pension benefits for current employees with a lower multiplier of 2 percent rather than 2.5 percent.
Estimated pension savings jump to $11 billion over 30 years when the defined contribution plan and lower multiplier proposals are added to the mix, according to the budget office.
There is debate over whether Pennsylvania can legally reduce even future pension benefits for current employees because of interpretations that the state constitution and case law define them as a contract between the state and its workers that can't be impaired. The legislation addresses that by providing for an automatic appeal of its constitutionality to the state Supreme Court upon enactment.
The purpose of the changes overall is to realize cost savings and make public pension benefits more fairer from the standpoint of taxpayers who foot part of the bill, said State Budget Secretary Charles Zogby. It would still leave public employees with a lucrative pension, he added.
The changes should not be viewed in isolation, but in the context of a public pension system that has not had any adjustments for inflation since 2001 yet seen major increases in the amount that employees contribute compared to government contributions, said Stephen Herzenberg, Ph.D., executive director of the Keystone Research Center, a Harrisburg think tank.
A 2010 state law reduced pensions for employees hired since that year by more than 20 percent through such steps as going to the lower multiplier, increasing the retirement age to 65 and extending the vesting period from 5 to 10 years, he said.
These changes are worthwhile to help bring costs in line, but they alone won't solve the problem with huge public pension debt due to underfunding of the pension systems by state government and school districts, said Richard Dreyfuss, a Hershey actuary who writes about pension issues for the Commonwealth Foundation, a Harrisburg think tank.
One change would curb the impact of any 11th hour spike in overtime pay by calculating pensions based on an average of an employee's final five years of salary instead of the current final three-year average.
Overtime pay is more of a factor with public safety employees, but many of them don't participate in Social Security. Using a five-year average would spread out the impact of having an overtime spike during one of those years, officials said.
This should make a pension more a reflection of earnings over a career than of a few years when someone gets a lot of overtime pay, said Mr. Zogby.
"The overtime is really racked up in the last year or two," he said. "That last three years drives the entire pension."
The second change highlighted above would calculate future pension benefits based on income up to an annual wage base set by Social Security. The base is currently set at $113,700. This would most likely affect veteran top-paid administrators and faculty at the public universities.
Fewer than one percent of the hundreds of thousands of members in PSERS and SERS receive pensions above the $113,000 level, said Mr. Herzenberg.
"It's a symbolic act," he said.
The third change would alter the formula to adjust the monthly pension benefits paid out if a current employee takes a lump sum payment based on their own contributions. Current pension rules allow retirees to withdraw any or all of the portion withheld from their own paychecks over the year, along with 4 percent interest, in a lump sum. The proposed formula change would prevent someone from getting a financial advantage on their monthly pension amount by taking the lump sum option, according to the budget office.
Contact the writer: rswift@timesshamrock.com