Pennsylvania policymakers made significant progress reducing the cost of state pensions with a 2010 law that cut the benefits of future employees, enacted new employee “risk sharing” to protect taxpayers in future economic downturns, and maintained public employee contribution levels that are higher than in most other states.
Over the next 30 years, the savings from these changes are estimated at $24.7 billion in the public school employees' pension plan and another $8.3 billion in the state employees' plan. Read more about this and other aspects of the pension debate at the Keystone Research Center's pension primer page.
Many already know that the Pension Reform Act of 2010 reduced pension benefits for new employees by more than one-fifth, capped the maximum pension benefit an employee can receive, and increased the time it takes for a pension to vest from 5 to 10 years. The law also increased the age and years of service an employee needs to retire with full benefits, and did away with an employee option to withdraw individual contributions at the start of retirement.
Few know about another unique provision of that law, which made Pennsylvania one of the first states in the nation to require employees to share in the risk of a future economic downturn.
Employees hired in 2011 or later must pay an additional “risk sharing” contribution of up to 2% if an economic downturn reduces public pension investment returns. The state and school districts can only require these higher employee contributions if they make corresponding increases in employer contributions.
This feature will give the state and school districts a disincentive to shortchange pension plans during future economic downturns. It makes it very unlikely that Pennsylvania will ever again accumulate large unfunded liabilities like it did over the last decade.
Finally, the 2010 law continues to ask public employees in Pennsylvania to pay a larger share of their salaries toward pensions than public employees in most other states. In fact, over the past decade, employees contributed almost twice as much toward public pensions as state and school employers.