The Pennsylvania Legislature has approved legislation to reduce the traditional pension benefit for future state government and public school employees in favor of a new 401(k)-style benefit. It would be the second pension benefits reduction to be imposed on future employees in eight years. Gov. Tom Wolf is scheduled to sign the bill Monday. Details of the bill:
BENEFIT COMPARISON
Under current law, a school employee hired today pays 7.5 percent of salary into a traditional pension plan with a benefit accrual rate of 2 percent. A state employee hired today pays 6.25 percent of salary for the same terms. For people hired before 2011, pension benefits are generally more generous.
Under the bill, new employees would have a choice of three plans: two that combine a traditional pension benefit and a 401(k)-style employer contribution and one that is entirely a 401(k)-style plan.
For the default plan that provides the biggest long-term benefit, a school employee hired after July 1, 2019, would contribute 8.25 percent of salary and receive a traditional pension plan with a benefit accrual rate of 1.25 percent and a 401(k)-style employer contribution of 2.25 percent. A state employee hired after Jan. 1, 2019, would get the same terms for that plan.
OTHER BENEFIT CHANGES
The normal retirement age would rise from 65 to 67. The traditional pension benefit would be based on an average of the five highest years of salary, instead of three years, to smooth out spikes that can inflate pension benefits. Voluntary overtime that would count toward the pension is limited to 10 percent of base salary.
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EMPLOYEES AND RETIREES
The bill does not reduce benefits for more than 700,000 current employees and the retirees in the two retirement systems, including lawmakers and judges when they are re-elected. It also does not force them to enroll in one of the new plans.
PAYOUTS
Under the bill, a school or state employee retiring on a salary of $60,000 would get an annual retirement benefit of about $33,000 to $34,000 from the default plan after working 35 years, according to the Legislature's nonpartisan Independent Fiscal Office. That compares with $40,500 under current law. Most state and school employees hired before 2011 would get an annual retirement benefit of about $51,000.
After 15 years of service with the same salary, a school or state employee would get an annual retirement benefit of about $12,000 from the default combined plan. That compares with about $17,000 under current law and about $22,000 for most employees hired before 2011.
PENSION DEBT
The bill has little or no effect on Pennsylvania's current projected pension debt of $62 billion and rising. The pension debt is attributed to the retirement benefits of current employees and retirees. That debt will take more than $200 billion to pay off over the coming three decades, according to information from the two pension systems.
RISK SHIFT
The increase in taxpayer obligations under the bill would rise by $45 billion over the next three decades if pension investments underperform expectations by 1 percentage point, according to the Independent Fiscal Office. The increase under current law would be $49 billion.
ADMINISTRATIVE COST
The cost to create the new plans is an estimated $50 million to the state.
EXEMPTIONS
About one-third of future state government employees will remain exempt from the plan changes and would continue to receive a traditional pension benefit. That includes newly hired state troopers, corrections officers, game commission and wildlife conservation officers, park rangers and various police forces.
