New teachers and state workers will no longer get a traditional pension in Pennsylvania.
Governor Tom Wolf signed a bill Monday, making it the ninth state to replace the pension with a “hybrid” retirement plan. It goes into effect in 2019.
The new plan combines elements of a traditional pension and a 401(k)-style account.
Overall, new workers will contribute more of their salary, work longer, and likely receive a smaller payout in retirement than under the current system, according to a report from the state’s Independent Fiscal Office.
But Pennsylvania’s pension system is currently one of the most underfunded in the country and is in need of reform. The bill had bipartisan support.
“It’s a win for Pennsylvania taxpayers and fair to Pennsylvania’s workforce,” said Governor Wolf at a press conference Monday.
The reform will build upon previous legislation to help fully fund the pension system and preserve a path to retirement for public workers, said Greg Mennis, a director at Pew Charitable Trusts.
“Our research indicates that this would be one of the most — if not the most — comprehensive and impactful reforms any state has implemented,” he wrote in a letter urging state lawmakers to pass the bill.
Over the past 10 years, Rhode Island, Virginia, Tennessee and Georgia have created plans similar to Pennsylvania’s. They require workers to contribute some of their salary to a pension-like plan that guarantees a certain payout based on their salary. Workers also contribute to a 401(k)-style plan that they can take with them if they leave public service. The state will make contributions to both plans on their behalf.
In Pennsylvania, workers will be defaulted into a hybrid plan, but there will be two other versions they could opt into.
Under the default, workers will have to contribute a total of 8.25% of their salary. (Teachers currently contribute 7.5% and other public workers pay 6.25%.) Most will have to work until 67, instead of 65, in order to get their full payout in retirement.
A state employee who works for 35 years and earns a final salary of $60,000, currently receives an estimated $40,000 a year in retirement. Under the reformed system, that same worker would receive $34,1048, according to the Independent Fiscal Office report.
Pennsylvania will offer a second hybrid option that requires a smaller contribution, but provides a smaller payout. As a third option, workers can choose to participate in the 401(k)-style plan only.
The changes apply to all school workers and most state workers, but excludes the state police, who will remain on a traditional pension system.
But not every worker may lose under the new system. Research from The Pew Charitable Trusts shows that those who leave public service early in their career could benefit. That’s because they’ll be able to keep their savings in the 401(k)-style part of their retirement plan with them.
About two-thirds of Pennsylvania’s public workers currently leave before they work long enough to take their pension, Mennis said.
“These are still competitive benefits compared to other states and compared to the private sector,” said House Speaker Mike Turzai at Monday’s press conference.
The reform is expected to save Pennsylvania taxpayers $1.4 billion over the next 32 years, from lower contributions alone. Any savings the state might see from shifting some of the investment risk to the employers were not included in that estimate.
Like pension plans in other states, Pennsylvania’s was badly hurt by the Great Recession. It also took a hit because of retroactive benefit increases made before the market took a dive. The pension fund went from a nearly $20 billion surplus in 2000 to a $70 billion deficit in 2015.
The state also fell behind on making its payments into the system, but a measure in the new legislation requires bigger contributions.
“We have challenges ahead of us, but because of this legislation, it will never ever happen again in the state of Pennsylvania,” said Senate Majority Leader Jake Corman.