Last week on June 7th, Pennsylvania’s State Senate voted a measure that would change its current pension system. Pennsylvania’s budget problems have been ongoing. The key stone state has been battling over running expenses, a collapsing budget and underfunded pensions. Some analysts place Pennsylvania’s debt burden at a towering $74.2 billion dollars. The recent bill was put forth in an effort to mitigate this increasing debt burden. But will the measure by the Pennsylvania Senate be enough to keep the budget from collapsing?
The Pennsylvania Senate voted to pass a hybrid pension system. This system will allow employees in non-high-risk jobs to receive half of their benefits from a 401(a) defined contribution (DC) plan and half from a traditional taxpayer-funded plan. The measure passed with overwhelming popularity with 40 voting in favor and only 9 voting against.
The measure is said to potentially save the state more than $5 billion while protecting it from future liabilities of $20 billion or more if it fails to meet investment targets. Unfortunately, such an assessment woefully underestimates the extent of the problem. While this can be considered a good first step, the hybrid system’s expected potential savings of $20 billion does not solve the $74.2 billion debts that tax payers will have to shoulder. Based on these numbers, it does not appear that Pennsylvania will be solving its fiscal crisis anytime soon. This measure only provides the state some breathing room in order to come up with a sustainable plan. If state and local government took a cue from the private sector, there would be wholesale recognition that defined benefit plans are not sustainable. The combination of unrealistic investment targets, insufficient contributions from members, early retirement, and the increased longevity of members creates the perfect storm for fiscal issues down the line. Pennsylvania will become a case study in what happens when measures simply do not go far enough.