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Following through on his word to balance the budget without raising taxes has been a challenging task for Governor Corbett. His administration has made tough decisions on government spending and there are more difficult decisions ahead. Balancing the public ledger has been accompanied with budget cuts which provoked discontent amongst many Pennsylvanians. While such necessary cuts has left many Keystone residents dissatisfied, the Commonwealth will produce a second sustainable budget. Unfortunately, there is a looming threat that lies ahead in the arena of skyrocketing state pension contributions. Lawmakers recently met with the Public Employees Retirement Commission. The commission’s grave testimonies made it abundantly clear that there must be attention focused on pensions in order to minimize the eminent day of reckoning.

Between state and public school employees, there is an unfunded liability of more than $40 billion which is more than 150% larger than the entire General Fund. The current budget appropriates more than $1 billion towards pension obligations. This is an increase of more than $300 million from last year. The state contributions are expected to rise 600% in merely six years to a total of $4.2 billion. The immense increase in pensions in the budget is certain to undermine the budgeting process for years to come. Lawmakers will be forced to substantially increases taxes or continue to make spending cuts. The retirement commission estimates that it will take more than 30 years to fund all the liabilities.

Unfortunately, this forthcoming pension crisis was self-imposed. Just a decade ago, the Public School Employees Retirement System (PSERS) was actually running in a surplus. During this time, the General Assembly passed 50% benefit increases for themselves, 25% increases for other state employees and a 25% increase for those already retired. In addition to boosting benefits, lawmakers voted to postpone making proper payments to the retirement plans in 2003 hoping that the fund would experience a rapid growth over the course of the next decade. However, the Great Recession caused a 30% collapse in the market value of the retirement funds. Coupled with the many years of underfunding, Pennsylvania is now faced with a fiscal nightmare as courts have ruled that it is not permissible to retroactively adjust benefits.

The introduction of a defined-contribution plan instead of the current defined-benefit plan is a vital component to recovery. Richard Dreyfuss, business and actuary scholar, emphasizes that defined-contribution plans boast several benefits in comparison to the current disastrous plan. In contrast to the unfunded liabilities accrued by pensions, defined-contributions’ annual government payments are the final cost. Benefits remain stable as a percentage of the employee’s payroll rather than rapidly increasing state costs to cover increasing liabilities and decreased investment returns. Not only do defined-contribution plans provide stable budgeting, but they also prevent manipulation by politicians who want to increase benefits while deferring the costs to the future. The defined-contribution plan is a pay-as-you-go system in which benefit increases require sufficient funding. This plan provides an important safeguard to taxpayers as costs are straightforward and not unfairly bestowed upon future taxpayers.

Pennsylvania’s pension obligations are growing at unsustainable levels and require immediate action from the General Assembly. The nature of pension plan politics has been to increase benefits while deferring costs into the future. The future has now caught up with the present. The Commonwealth must institute a retirement plan that is both fiscally responsible and fair to taxpayers.

Jonathan Humma blogs at Keystone Liberty: Limited government and free markets for a prosperous Pennsylvania.

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