Pennsylvania law might guarantee retired state employees a set pension when they retire, but mathematics has its own laws.
All the legal protections in the world mean nothing if a pension plan is insolvent. Retirees in Detroit just found this out. If our commonwealth is to avoid this hard lesson, the legislature must act with a political resolve that has been lacking too long.
The facts are simple. For more than a decade, the state has paid less than needed into its two major pension funds — the State Employee Retirement System and the Pennsylvania School Employee Retirement System (PSERS). In a system that funds its pensions out of the general budget, it was easier to paper over that debt than to reduce spending on politically popular programs. It is hard to tell someone their welfare check is being reduced or that their community center won’t be funded so we can pay off a debt they can’t see — a payment that basically preserves the status quo.
Instead, political leaders, abetted by state employee unions, made the astonishing decision to simply assume that the $50 billion in assets sitting in the pension system would earn 8.5 percent in investment income. The real number proved to be less than half that.
In fact, the system currently pays out $3 billion more than it takes in every year. As things now stand, the system is $47 billion short of what it will need in order to cover current and future retirees — and that figure is growing.
It is not just the citizens of Pennsylvania that have noticed this problem. The financial world has noticed too. Last year, both Moody’s and Fitch, two of the major investment ratings firms, lowered the state’s rating. The lower the credit rating, the higher the interest the state will pay on what they borrow.
Read more in the February 2014 Business Magazine.
