When it comes to teacher pensions, Pennsylvania has the fourth largest unfunded pension liability in the nation, according to a recent report that argues the pension systems in most states are not only unfair to taxpayers, they also are unfair to teachers.
The National Council on Teacher Quality compared pension plans in all 50 states, looking at unfunded liabilities and other factors. Nationwide, the report estimates teacher pensions systems have almost $325 billion in unfunded liabilities. Pennsylvania makes up slightly more than 6 percent of that total, with an unfunded liability of $19.7 billion – equal to $1,563 for every man, woman and child in the state.
And the report argues the problem is worse than the numbers suggest due to unrealistic assumptions and projections about returns on investments. It cites one expert who predicted in 2010 that no state will meet its projected returns.
While the Pennsylvania School Employee Retirement System, the agency that runs the state's teacher pension fund, has a well-regarded track record of exceeding general market returns on investment, it tacitly acknowledged the unrealistic assumptions issue last year by reducing its expected rate of return from 8 percent to 7.5 percent.
Pennsylvania's shortfall is the fourth worse in the nation dollar-wise, but it compares better when looking at the percent of liabilities that are fully funded. The report notes Pennsylvania's system is 75.1 percent fully funded, better than 28 other states. The worst: Indiana, with only 44.3 percent of liabilities fully funded.
The report looks at recent pension reforms and contends most have been attempts to tinker with systems in need of serious attention.
Pennsylvania's latest reform was Act 120 of 2010, which lowered the amount a pension increases per year of employment from 2.5 percent of pay to 2 percent of pay. It also doubled vesting time from five years to 10, and required most teachers to wait until they are 65 to start receiving pension payments. But all those rules apply only to new teachers.
More generous benefits remain intact for those hired before Jan. 1, 2011, and critics contend the law did little to reduce looming spikes in the amount districts must pay into the system, calculated as a percentage of teacher pay. In 2013 that percentage climbs from 12.36 percent to 16.93 percent.
The NCTQ report suggests that increasing vesting time is the wrong way to go because it makes it harder for teachers to move to another state, and recommends a maximum of three years. The report agrees with setting a uniform age – such as 65 – for the start of pension payments, contending this makes the plan fair to all teachers.
The report also recommends plans be portable, traveling with the teacher, and suggests teachers be given options in the types of plans they can enroll in: traditional defined benefits such as Pennsylvania's, defined contribution plan in which an employee pays a set amount into a fund that may vary in final payments, or a hybrid.
While defined benefits plans – guaranteed pension amounts upon retirement – may seem like the best choice for teachers, the report argues that ideal isn't working out. The unfunded liabilities have led to cuts in teacher benefits, increases in their contribution rates, and longer vesting periods, while restricting a teacher's ability to move without hurting his or her final pension. The current system also has led to heavier burdens on taxpayers to cover fund shortfalls, leaving less money for classrooms and school programs.
The report recommends states take meaningful steps to cover existing liabilities, make substantive changes to ensure pension benefits are portable and fair to all teachers, and take steps to remove politics from the whole system, to prevent the raiding of pension funds and to stop policymakers from making politically expedient commitments now that will not have to be paid for until much later