The Pension Crisis

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The General Assembly is expected to address a pending crisis in the Pennsylvania School Employees’ Retirement System (PSERS)—the state agency that provides retired PSEA members with their monthly pensions.

Because the contributions that employers—school districts and the state—make to the system are projected to increase dramatically in 2012-2013, PSEA is anticipating some difficult debates and decisions that could fundamentally change the system.

Pension benefits for school employees currently participating in PSERS—people who are employed or already retired—are locked in by law. But there is concern that potential changes to the system could negatively affect PSERS funding or reduce benefits for future employees.

“It’s all too easy for retirees to distance themselves from what happens to new hires or other changes that do not appear to directly affect them,” said PSEA President James P. Testerman.

“We are asking retirees to remember we are part of one union. At the same time we are supporting a cost-of-living adjustment (COLA), we also need to get involved and help protect the rights of current and future workers who deserve the quality benefits that retirees enjoy today. When we were newly hired, the experienced people watched out for us.”

Testerman added, “While the likelihood of a COLA may have decreased due to the recession, we do have hope that COLAs are achievable when economic conditions improve.”

“Some legislators have introduced bills to close off PSERS to new hires and put them, along with new state and municipal employees, in a separate pension plan with individual accounts similar to 401(k) or 403(b) plans. This would not only undermine support for PSERS,” Testerman added, “but probably eliminate any hope for PSERS retirees that they will get COLAs in the future.”

Research shows that defined contribution systems (DC) for public employees, despite their popularity with some legislators, can cost taxpayers more than defined benefit (DB) systems such as the one we currently have in Pennsylvania. First, the administration

of tens of thousands of separate accounts in DC plans is much more costly than the administration of DB plans. For example, defined contribution plans have to follow investment instructions from each individual participant. This is more costly administratively than using the “economies of scale” in a defined benefit plan to make a single decision for the pooled assets of the entire fund.

Secondly, professional money managers generally have better results with a large pool of assets and access to higher earning investments than an individual with a relatively small pool of money will achieve.

Those legislators who are part of the nationwide overall attack on retirement security keep insisting, however, that DC plans are cheaper. But we must remember that these are part of the same groups that led the push to privatize Social Security. Their goal is to shift the economic risk from employers to employees by tying retirement benefits directly to personal investment returns. It takes no imagination to know what would have happened to the retirement income of senior citizens over the last two years if Congress had privatized Social Security in 2005.

Be prepared. If the legislators propose changes to PSERS that could harm retirees and active members, we will need your help!

Learn more at www.psea.org/pension.