Excuse Me, Governor, Aren’t You Forgetting Something?

This January, Governor Wolf sent $1.8 million taxpayer dollars to consultants at McKinsey & Co., who ironically provided his budget secretary with a 78-page report entitled: “Achieving a sustainable budget for the Commonwealth of Pennsylvania.”

You don’t always get what you pay for. At over $23,000 per page, taxpayers should feel scammed – not once does the McKinsey report ever mention the term “public pension reform.” It was conspicuous, but probably not coincidental, that the topic was also avoided in the Governor’s February budget address.

How could any report on the “sustainability” of Pennsylvania’s fiscal condition, or any credible budget proposal for that matter, fail to mention our greatest budgetary cost-driver?

In fairness to Gov. Wolf, the makings of our pension crisis predate his tenure in office. Short-sighted policymaking, namely lavish benefit increases approved by Gov. Ridge and habitual underfunding under Gov. Rendell, are largely to blame. Unfavorable investment markets following 9/11 and throughout the Great Recession severely compounded our predicament.

Finger-pointing will not change our reality. Testimony delivered at a recent Senate Appropriations hearing revealed the two state pension systems have only 58 cents for every retirement dollar promised and combined “unfunded liabilities” (long-term projected debts) in excess of $62 billion. Alternate valuations of our debt portfolio are even worse. 

As unfunded liabilities grow, additional budget dollars will be dedicated to servicing our enormous debt. Future generations (read: our children) will foot the bill.

Individuals will be faced with increased income, sales, and property taxes. Businesses will shoulder additional tax burdens as well, assuming they opt to remain in a tax climate like Pennsylvania’s.

Absent additional tax revenue, vulnerable populations will suffer as funding for core government services will need to be reduced or held stagnant. Classrooms will cease to be adequately funded. Roads, bridges and other public infrastructure will crumble from neglect. In extreme cases, retirement benefits could retroactively be reduced.

To avoid these very real possibilities, the Governor, organized labor and members of the opposite party must first concede that the current “defined benefit” scheme is simply too risk-laden and too costly to administer.  

Seventy-one cents of every dollar Pennsylvania pays its retired state and school workers comes from investment proceeds. When investment returns fall short of the state’s lofty assumptions, as they perennially do, the state accrues additional debt.

These investment shortfalls become debt because our retirement programs offer an antiquated, inflexible benefit plan. Bottom line: no matter how investments perform, the benefit owed to the retired state worker stays the same. The taxpayers of Pennsylvania inappropriately assume the investment risk under this flawed paradigm.

Second, consensus must be built on the parameters and design of a lasting reform proposal. A majority of Pennsylvanians, myself included, support enrolling future government and school employees into 401(k)-type retirement plans.

For decades, the 401(k) has been the preferred savings vehicle of the private sector. Not only does it provide flexibility and portability for today’s mobile workforce, it treats pensioners like adults by giving them a say in their investment strategy.

By definition, “defined contribution” plans prevent the accrual of additional debt, protecting the state’s credit rating and, more importantly, shifting considerable risk away from taxpaying families.

This week, I attached my name in support of the Senate’s latest pension reform bill. The legislation strikes a fair compromise by providing a “defined contribution” plan alongside a smaller traditional pension benefit, as well as an optional 401(k) for those who choose to enroll.

The bill, which impacts future hires only, has been fully vetted by the Legislature and replicates a bill which came just three votes shy of becoming law last year.

Despite its estimated $3 billion in savings, critics will claim it doesn’t save enough. Others will say anything less than a complete 401(k) plan is “reform in name only.”

Some detractors will say the plan provides a deficient benefit while conveniently overlooking Social Security income and private retirement savings. Perhaps the most disingenuous argument will be that the bill dissuades young workers from accepting employment offers from the state or local schools.

In the words of President Kennedy, “There are risks and costs to action. But they are far less than the long-range risks of comfortable inaction.” The Governor’s failure to even mention the pension crisis at best constitutes “comfortable inaction.” At worst it constitutes willful negligence.  

The time for comfortable inaction has long since passed. The security and prosperity of our children and grandchildren are in grave jeopardy. The time for pension reform is now.

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