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PUBLIC PENSIONS IN PENNSYLVANIA: PowerPoint Presentation
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  1. A Looming Crisis? PUBLIC PENSIONS IN PENNSYLVANIA: DUQUESNE UNIVERSITY

  2. HISTORY OF PENSIONS • Prior to 1950s few people had pensions • Most worked until they died • Initial issue: company specific or industry-wide? • Labor wanted industry-wide (but lost) • G.M. first offered company pensions in 1950 • Set the trend DUQUESNE UNIVERSITY

  3. TYPES OF PENSIONS • Defined Benefit • Formerly the most common • Defined Contribution • Now the most common DUQUESNE UNIVERSITY

  4. PA Provides Two Major DB Pensions: • State Employee Retiree System (SERS) • Most Commonwealth Employees • Funded by the Commonwealth, Employee Contributions, and Investment Income • Public School Employees’ Retirement System (PSERS) • All Public School Teachers • Funded by the Commonwealth, School Districts, Employee Contributions ,and Investment Income DUQUESNE UNIVERSITY

  5. PA Defined Benefit Plans • Guarantee a fixed monthly income upon retirement, usually for life • Minimum number of years to be vested • Amount determined by formula • Years of service • Average salary at retirement • A “multiplier” DUQUESNE UNIVERSITY

  6. Defined Benefit Plans • Employer has life-long obligation • The Social Security system provides a form of a defined benefit retirement plan DUQUESNE UNIVERSITY

  7. Defined Benefit Formula • Annual Pension Equals • (Years of Service) X • (Average Salary) X • (Multiplier) DUQUESNE UNIVERSITY

  8. Defined Benefit Plans • Years of Service • Often allow credit for other employment or military service • Allow participants to buy service years DUQUESNE UNIVERSITY

  9. Defined Benefit Plans • Average Salary • PSERS and SERS use average of highest 3 years • Extra pay included in the average • Overtime • Holiday Pay • Extracurricular Activities • Developing Curriculum • Attending Workshops DUQUESNE UNIVERSITY

  10. Defined Benefit Plans • Multiplier • Most PA employees have a multiplier of 2.5% • Suppose 35 years of service and an ending salary of $80,000 (PS 10) • Pension = $70,000 per year • Over 20 years the cost is $1,400,000 DUQUESNE UNIVERSITY

  11. How it Adds Up:Changing the Salary DUQUESNE UNIVERSITY

  12. How it Adds Up:Changing the Years DUQUESNE UNIVERSITY

  13. How it Adds Up:Changing the Multiplier DUQUESNE UNIVERSITY

  14. How it Adds Up:Changing the Multiplier DUQUESNE UNIVERSITY

  15. The Hidden Menace in Multipliers • There are about 110,000 active SERS members • If the average salary at retirement is $50,000, then Increasing the multiplier from 2.0% to 2.5% results in an increase of: • 110,000 X $175,000 = $19.25 billion DUQUESNE UNIVERSITY

  16. Pittsburgh’s Going to the Super Bowl!!!

  17. Defined Benefit Plans as a Ponzi Scheme • DB plans are workable as long as there are increasingly more workers than retirees • When Bethlehem Steel went bankrupt in 2001 it had 7.5 dependents for each worker • In 1962 GM had 1 retiree to 11.6 workers: today it has 3.2 retirees per worker • There are about an equal number of SERS workers an d retirees (110,000) • There are 264,000 active PSERS members and 168,000 retirees DUQUESNE UNIVERSITY

  18. Fewer Defined Benefit Plans • The Demographics are working against DB plans • Market realities have caused most private sector firms to abandon them. • Very similar to the problems facing Social Security DUQUESNE UNIVERSITY

  19. Fewer Defined Benefit Plans DUQUESNE UNIVERSITY

  20. DB: The Funding Problem • Employee Contributions • SERS 6.25%. • PSERS 7.5% • Returns on investments • Expected 8.5% • 1950 – 05: S&P up 7.94% 1950 -09: S&P up 6.75% • Commonwealth contributions vary • When returns are low contributions must increase • In June 2008 the Governor estimated state contributions would need to more than double by 2012 DUQUESNE UNIVERSITY

  21. Defined Contribution Plans • Employer and Employee each make a contribution to an investment fund • The usual is a 401(k) plan • National average employer contribution is about 3.0% of salary • Most employees “manage” their account • The employer obligation ends at retirement • George W. Bush’s idea for SS DUQUESNE UNIVERSITY

  22. Difference in Cost • The cost of a defined benefit plan can be less than, the same as, or more than a defined contribution plan -depending on the rate of return • One advantage of the defined contribution plan is that the cost can be predicted DUQUESNE UNIVERSITY

  23. Three Recommendations • Gradually shift to a defined contribution plan • Gradually impose the state and local income tax on SERS & PSERS income • Increase the age for full DB pensions – similar to Social Security DUQUESNE UNIVERSITY