State treasurer: Governor's pension reform would dig deeper hole
State Treasurer Rob McCord said Gov. Tom Corbett's plan to reform Pennsylvania's pension system will only dig the state a deeper hole.
McCord, joined by officials of the labor-backed Keystone Research Center, participated in a phone conference with media Tuesday in which they said the proposals would grow the state pension shortfall.
In addition to "kicking the can" down the road by giving the state another "pension holiday," McCord said converting new employees from defined benefit pension plans to 401(k)-style plans would drive up the pension deficit.
As new employees would be put in 401(k)-like "defined contribution" plans, it would reduce the number of new workers paying into the system that pays existing and future pensioners. That money would be made up by taxpayers. "It tears apart the third leg of the pension system - the employer contribution - while impairing returns," he said. "It's dangerous."
Over time, the fund paying out defined benefits would get smaller. As a result, pension managers would shift money to less risky lower return investments, hurting yields.
"You are almost certain to reduce investment returns because you are going to have less money to invest and a lower rate of return," McCord said.
The state's Pension Reform Act 120 of 2010 will significantly reduce pension costs over time, the panel said, but needs time to yield a full benefit. The new employees under Act 120 are lower cost, with lower expenses, reduced benefit multipliers and risk-sharing mechanisms between state and employee or school district and employee. As more employees are added under Act 120, the state realizes the full benefit of the reforms.
The governor's proposal includes changes to the pension benefits multiplier for existing employees, a change that will surely be challenged in court, McCord said, and should not be banked on.
The center and McCord focused on one component of the governor's reform and failed to acknowledge savings, said Corbett's spokesman Jay Pagni.
Shifting new employees to the defined contribution plan, taxpayers are shielded from a greater portion of future risk should the market decline or crash.
"We know the defined contribution plan is just part of the answer," Pagni said.
Pension Reform Act of 2010 was a start, he said, noting that two-thirds of all new revenue coming into the state is consumed by pensions.
"We want to meet our pension obligation and continue to pay for core government programs," he said.
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