Tobash’s hybrid public pension proposal
Capitolwire: Tobash’s hybrid public pension proposal ‘holds lots of potential’ as pension reform talks continue.
When asked about Tobash’s pension reform proposal, state Budget Secretary Zogby said the plan “holds a lot of potential and is very consistent with the principles and goals embodied in Gov. Corbett’s reform plan.”
By Chris Comisac
Capitolwire
HARRISBURG (Jan. 29) – Discussions about pension reform have waxed and waned during the last few years, with another push for new reforms apparently in the cards during the next couple of months.
There are a few pension reform plans under consideration right now, but one that’s been getting some more focused attention from both the General Assembly and the Corbett administration is legislation proposed by Rep. Mike Tobash, R-Schuylkill. Sources close to those discussions believe Tobash’s hybrid defined benefit (DB)/defined contribution (DC) proposal could shave as much as $7 billion from the current unfunded liability under the pension changes implemented by Act 120 of 2010.
As for those Act 120 provisions, which some within the Legislature would like to keep in place without any additional changes, Tobash, while acknowledging the act’s revised DB plan isn’t “horribly expensive,” said Act 120 “kinda looks like paying on your credit card the minimum balance.”
He added: “We have to do better, or we’re not going to climb out” of the current pension hole – a $47 billion unfunded liability that will eventually get to $65 billion as the pension payments for both the state and school districts explode during the next few years.
Tobash said his plan has undergone some alterations since it was originally proposed, but things are taking shape, something confirmed by others close to the pension discussions.
As it stands right now, the plan would allow newly-hired public employees to have a DB plan, like the one currently available to all public employees, but only for the first $50,000 of their annual incomes. Any annual salary over $50,000 will be invested in a 401(k)-style DC plan. The employee would also be capped at contributing to the DB plan after 25 years of employment; after 25 years, all employee contributions go into the DC plan.
“The defined benefit plan acts as a safety net,” said Tobash about the hybrid pension proposal.
“A safety-net defined benefit plan in the public sector is not a bad idea,” said Tobash, who noted that reducing taxpayer risk by cutting a DB plan might not actually result in a reduction of taxpayer risk if retired public employees with adequate retirement savings end up needing other social safety-net programs during their retirement. That’s a sentiment that has been echoed by many during pension reform conversations, including state Budget Secretary Charles Zogby.
“So that retirement benefit that is guaranteed, I think, is not unreasonable to offer, as long as we’re doing it at a level that’s affordable – that is common sense and realistic pension policy,” said Tobash, who added it’s important to maintain “a competitive retirement scenario for state employees.”
Under those conditions, the DB pension for new employees would max out at $25,000 per year. However, the plan will also include an indexing mechanism that will bump up the maximum salary limit by no more than 5 percent every five years, so the maximum DB plan benefit will increase over time.
Tobash said the idea behind the indexing mechanism is to avoid the General Assembly having to go back and revisit pension policy in the future.
Obviously, for state employees that are employed longer than 25 years or have salaries greater than $50,000, their retirement savings would be different under Tobash’s plan compared to the current Act 120 system. But if you’re an employee earning $42,000 annually and you work no more than 25 years, Tobash said there’s no real difference between the current DB plan and the DB component of his proposal.
The proposal also envisions a 7-percent contribution by the employee, with 1 percent of that contribution going to the new DC plan on dollar-one of the new hire’s earnings. The remaining 6 percent is contributed to the DB plan until the employee hits their time or salary limits, at which point the 6 percent is deposited in the DC plan.
Tobash indicated an employer matching rate has yet to be finalized for employees that have not hit their limits for the DB plan, but that it would be “a small state match.” Once those limits are reached, the employer would have a 4-percent match for DC plan contributions, with something smaller than that – about one half of a percent employer match – for the money contributed to the DC plan before the DB plan limits are hit.
“This plan is a mix of defined benefit and defined contribution … a reasonable shift to a DC plan,” said Tobash. He added the dollar-one DC contribution component of the plan ensures employees are invested in the DC plan immediately, and that some “meaningful” value is built within the DC plan for the employee.
When asked about the Tobash proposal, Budget Secretary Zogby, a longtime advocate for pension reform, said: “Tobash’s side-by-side [plan] holds a lot of potential and is very consistent with the principles and goals embodied in Gov. Corbett’s reform plan. Along with the governor, major credit goes to Reps. Tobash, [Warren] Kampf, [Chris] Ross and [Glen] Grell along with Sens. [Pat] Browne and [Mike] Brubaker for continuing to advance the cause of reform forward and for burrowing into the details to help fix on a formula for reform that works for taxpayers and school districts.”
The plan would also annuitize the employee’s DB plan at age 65. An employee seeking to annuitize their defined benefit sooner than age 65 would have their annuity reduced in an actuarially-sound manner to prevent additional system unfunded liability.
Tobash said “people are living longer” and the pension systems aren’t properly funded to pay full pensions for people who retire at age 50 and live to age 95.
“We don’t have the capability to get the money into” the pension system those retirees will be pulling out, he said.
Work still remains to be done regarding the plan and conversations about the proposal continue on a regular basis, but things could soon be ready, said Tobash.
“The [pension] systems are working specifically on the elements of this plan,” he said, indicating PSERS and SERS are modeling how his proposal would impact the two systems’ financial situations.
Tobash said he hopes “within the next month that we’ll have a pretty solid document” for people to review.
“With reasonable pension reform in the commonwealth, we can develop the savings we need to start to manage our way out of this hole that we’ve dug – make no mistake, it is a massive hole, and make no mistake, there’s no magic wand … we’ve got to start chipping away at this thing one step at a time.”
Robert Storm
Eastern Region Vice President
www.pscoa.org