1 / 23

PUBLIC PENSIONS IN PENNSYLVANIA:

Explore the history and types of public pensions in Pennsylvania, with a focus on the defined benefit plans. Understand the funding challenges and potential solutions for this growing crisis.

frostr
Download Presentation

PUBLIC PENSIONS IN PENNSYLVANIA:

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. A Looming Crisis? PUBLIC PENSIONS IN PENNSYLVANIA: DUQUESNE UNIVERSITY

  2. HISTORY OF PENSIONS • Prior to 1950s few people had pensions • Most worked until they died • Initial issue: company specific or industry-wide? • Labor wanted industry-wide (but lost) • G.M. first offered company pensions in 1950 • Set the trend DUQUESNE UNIVERSITY

  3. TYPES OF PENSIONS • Defined Benefit • Formerly the most common • Defined Contribution • Now the most common DUQUESNE UNIVERSITY

  4. PA Provides Two Major DB Pensions: • State Employee Retiree System (SERS) • Most Commonwealth Employees • Funded by the Commonwealth, Employee Contributions, and Investment Income • Public School Employees’ Retirement System (PSERS) • All Public School Teachers • Funded by the Commonwealth, School Districts, Employee Contributions ,and Investment Income DUQUESNE UNIVERSITY

  5. PA Defined Benefit Plans • Guarantee a fixed monthly income upon retirement, usually for life • Minimum number of years to be vested • Amount determined by formula • Years of service • Average salary at retirement • A “multiplier” DUQUESNE UNIVERSITY

  6. Defined Benefit Plans • Employer has life-long obligation • The Social Security system provides a form of a defined benefit retirement plan DUQUESNE UNIVERSITY

  7. Defined Benefit Formula • Annual Pension Equals • (Years of Service) X • (Average Salary) X • (Multiplier) DUQUESNE UNIVERSITY

  8. Defined Benefit Plans • Years of Service • Often allow credit for other employment or military service • Allow participants to buy service years DUQUESNE UNIVERSITY

  9. Defined Benefit Plans • Average Salary • PSERS and SERS use average of highest 3 years • Extra pay included in the average • Overtime • Holiday Pay • Extracurricular Activities • Developing Curriculum • Attending Workshops DUQUESNE UNIVERSITY

  10. Defined Benefit Plans • Multiplier • Most PA employees have a multiplier of 2.5% • Suppose 35 years of service and an ending salary of $80,000 (PS 10) • Pension = $70,000 per year • Over 20 years the cost is $1,400,000 DUQUESNE UNIVERSITY

  11. How it Adds Up:Changing the Salary DUQUESNE UNIVERSITY

  12. How it Adds Up:Changing the Years DUQUESNE UNIVERSITY

  13. How it Adds Up:Changing the Multiplier DUQUESNE UNIVERSITY

  14. How it Adds Up:Changing the Multiplier DUQUESNE UNIVERSITY

  15. The Hidden Menace in Multipliers • There are about 110,000 active SERS members • If the average salary at retirement is $50,000, then Increasing the multiplier from 2.0% to 2.5% results in an increase of: • 110,000 X $175,000 = $19.25 billion DUQUESNE UNIVERSITY

  16. Pittsburgh’s Going to the Super Bowl!!!

  17. Defined Benefit Plans as a Ponzi Scheme • DB plans are workable as long as there are increasingly more workers than retirees • When Bethlehem Steel went bankrupt in 2001 it had 7.5 dependents for each worker • In 1962 GM had 1 retiree to 11.6 workers: today it has 3.2 retirees per worker • There are about an equal number of SERS workers an d retirees (110,000) • There are 264,000 active PSERS members and 168,000 retirees DUQUESNE UNIVERSITY

  18. Fewer Defined Benefit Plans • The Demographics are working against DB plans • Market realities have caused most private sector firms to abandon them. • Very similar to the problems facing Social Security DUQUESNE UNIVERSITY

  19. Fewer Defined Benefit Plans DUQUESNE UNIVERSITY

  20. DB: The Funding Problem • Employee Contributions • SERS 6.25%. • PSERS 7.5% • Returns on investments • Expected 8.5% • 1950 – 05: S&P up 7.94% 1950 -09: S&P up 6.75% • Commonwealth contributions vary • When returns are low contributions must increase • In June 2008 the Governor estimated state contributions would need to more than double by 2012 DUQUESNE UNIVERSITY

  21. Defined Contribution Plans • Employer and Employee each make a contribution to an investment fund • The usual is a 401(k) plan • National average employer contribution is about 3.0% of salary • Most employees “manage” their account • The employer obligation ends at retirement • George W. Bush’s idea for SS DUQUESNE UNIVERSITY

  22. Difference in Cost • The cost of a defined benefit plan can be less than, the same as, or more than a defined contribution plan -depending on the rate of return • One advantage of the defined contribution plan is that the cost can be predicted DUQUESNE UNIVERSITY

  23. Three Recommendations • Gradually shift to a defined contribution plan • Gradually impose the state and local income tax on SERS & PSERS income • Increase the age for full DB pensions – similar to Social Security DUQUESNE UNIVERSITY

More Related