#PABudget: Pension Payments and Tom Wolf’s First Term

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Bram Reichbaum is right that Tom Wolf is probably going to have to do…something about pensions.

It’s not worth talking about on the campaign trail, but it is time to start tuning in to this issue because pension payments are about to start ramping up over the next few years, and the Wolf administration is going to need to find another $2 billion a year by the end of his first term.

It’s not catastrophic or anything – the budget is about $29 billion – but it’s a pretty decent chunk of money. We were talking about a lot of pain from a $1.2 billion budget hole this time, and people were worried about that.

Another point to make about these projections is that while these are Corbett administration numbers, and some readers are probably tempted to think the Corbett administration is overestimating the threat level because they want to soak unions, in this case they’re underestimating the threat level to make their own plan look good.

They’re actually presenting a very rosy picture of the situation, assuming a 7.5% annual return. That’s an absurdly high rate to assume, so realistically we could be talking about an additional $3-4 billion responsibility per year relatively soon.

Again, not catastrophic. But it is $3-4 billion worth of spending cuts (preferably tax expenditures) or tax increases that the next Governor is going to have to identify in the 2015-2016 budget.

From a purely partisan perspective, there’s no reason for Tom Wolf to get baited into discussing these issues during the campaign. But it is time for the Blue Team wonks to start kicking around a plan to find that amount of money, because these days I’m hearing a lot of Democratic candidates double and triple-counting the revenue from the natural gas severance tax. We can use it for education, or the budget, or transportation, but the severance tax alone is not going to pay for it all.

I don’t think there is any reason for Democrats to vote for any “pension reform” bill that changes defined-benefit plans for anyone, or cuts benefits for anyone. 401Ks are a failure of a retirement savings policy. We do have the option of not changing our pension plans, and just paying for our pension responsibilities by cutting tax exemptions and expenditures. But we have to think beyond just the severance tax.

For instance, many of our tax expenditures go toward subsidizing fossil fuels. PennFuture says we could be getting about $2.9 billion a year by eliminating these subsidies.

We should also accept the federal Medicaid money, fully close the Delaware loophole with combined-reporting, and explore joining the Regional Greenhouse Gas Initiative (conditional on the energy-importing states accepting some reforms). Over the long term we can try to overturn the Uniformity Clause and introduce a progressive structure to PA’s income tax.

There’s plenty of stuff we can do to raise that money, but the Democratic Party needs to start having a conversation with itself about what the Wolf plan should be.

This entry was posted in Budget, Elections, Governor, Issues.

21 Responses to #PABudget: Pension Payments and Tom Wolf’s First Term

  1. Carl Feldman says:

    Here’s an easy 100 mill, get rid of tax exempt status for candy and gum. Wendy Taylor, Sierra Club president and former employee with the department of revenue under Room Wolf came up with it. http://www.pennlive.com/opinion/2014/06/100_million_pennsylvania_state.html

  2. Albert Brooks says:

    So, even though the Stock Market has an average return of over 9% for the past 10 years, over 11% for the past 50, it is up to state to tax those of us who planned ahead to pay for the people who didn’t and the ones who decided to buy the BMW instead of a Ford and put some money away or bought more house than they could afford. A stock market index fund let alone without any thought put into it makes money. With a little strategy can make even more. My 401K is doing just fine as are a number of peoples..

    Just because people don’t have a savings retirement plan (by their own choosing) does not mean 401Ks are a failure it means that those people are not that bright. When does personal responsibility enter into your plan? If you can’t retire at the lifestyle you are used to it means you spent too damn much on that lifestyle.

    • Jon Geeting says:

      “Personal responsibility” has never worked to produce good national savings rates. Never. There has to be some kind of forced savings program.

      • Albert Brooks says:

        Never? Aren’t you being a bit – oh how shall I put it…..wrong. There are a number of counties with better savings rates then the U.S.and they aren’t forced to do it. So sayeth the World Bank (http://data.worldbank.org/indicator/NY.GNS.ICTR.ZS) If you keep giving these people a free ride they will never learn generation after generation.

        You can pay what ever you think I owe because personally I’m not. Wolf hasn’t even been elected and already you are doing the tax and spend dance.

        • phillydem says:

          I’d guess many of those countries have national or socialized health care, too.

          There are a large number of working people who simply don’t make enough money to save even if they wanted to.

          Further, some people who did save and contribute to 401ks
          saw their life saving wiped out by the market crashes of 2001 and 2008.

          You’re lucky neither of the above apparently applies to you.

          • Albert Brooks says:

            You don’t have to guess you can look at the chart and figure it out. Did I get hit in the dot com bubble in 01 and the recession of 08? Some but that is why you don’t put all your eggs in one basket. I’ve never had a 401K that I couldn’t pick the type of investments. The market did go up 30+% just last year so you didn’t have to be a wizard to make something.. If people spent as much time looking at the financial options as they do picking out the color of the new couch they would be far better off.

            But hey, spend it all now because people like Jon will come along and take other peoples money and bail you out…no problem..

          • Jon Geeting says:

            We tried it your way. We spent all this time promoting 401Ks as an individualistic alternative to more Social Security or forced saving and it didn’t work. You can tell it didn’t work because the savings rate is so low and the people just nearing retirement and the Millennials have shit for savings. The policy failed.

          • Albert Brooks says:

            Social Security was never meant to be a retirement account. It was designed to be a supplement. That is why there were and are earnings limitations because those who make above X amount did not need the supplement.

            There was never a time where the majority of workers had Defined Benefit plans. As of the 1978 Revenue Act, which is really the beginning of the Defined Contribution era, only 38% of workers had a DB plan. Add to that the ability to take a DC plan with you as you changed jobs (which also increased significantly) and the shift to a more service economy and it suited a large number of employees.

            Once again you try to have the state replace personal responsibility.

            Oh, and I’ve always had my eye on the Philippines as a place to live, I liked the year I spent there more than Singapore.

          • Jon Geeting says:

            Again, what is a country that has a higher savings rate than us without a forced savings or national pension strategy? You can’t find one. I don’t care what Social Security was meant to be or not. It’s the only thing that’s working to produce any type of retirement security for most Americans right now, and we need to expand it.

          • phillydem says:

            Social security is not a “supplement”. It’s insurance which is why it’s official name is “Old Age, Survivors and Disability Insurance” (OASDI on your payroll deductions). Nor is it means tested. Anyone who works 40 qtrs (10 yrs) and has OASDI deducted from their pay is eligible when they reach the required age to apply. There is a limit as to how much one can earn and not have social security payments cut, but that only applies to income earned between “early” social security retirement age (62-65/66/67) and full retirement age. Then there’s no reduction in benefit regardless of wages earned although there remains a cap on the amount of income subject to OASDI taxes.

            And no one is saying don’t save on your own, but many people can’t save or don’t have savings due to things beyond their control.

          • Albert Brooks says:

            National Pension Strategy? Well that covers everything form talk to deed so you are probably correct given that scope.

        • Jon Geeting says:

          Which countries would you like to see us emulate? Singapore is usually the go-to country for conservatives on pensions, and they have a forced savings policy. Same with Chile.

          • Gdub says:

            Albert, no pension fund is going to put all of its assets into stock index funds, which is why assuming 7-9 percent growth is not realistic.

            Pension funds are designed to preserve assets and allow growth while minimizing volatility. Comparing a pension plan to an index fund makes little sense.

            While a 25 year old can afford to go stock heavy, a big public workers fund cannot. I get concerned when I see continued high projections, which indicates the risk level may be much too high.

          • Albert Brooks says:

            Gdub – Absolutely which is why I said you don’t put all your eggs in one basket. A DB fund gives little or no choice to the participants as how they want their money invested. A DC fund usually does, The individual can select the level of risk they are willing to take. If something tanks then that is the risk you assume, If you want no risk you do T-bills and get rewarded appropriately for the no risk policy – meaning very little ROI.

            However, my conversation is about if DC plans are a viable alternative to DB plans and in the modern era they are. Retirement funds are heavily invested in stocks but they aren’t high risk or high reward ones What fund managers should or should not invest in and the level of risk they take can be for another time.

          • Gdub says:

            That isn’t a relevant debate to the current problem. We have DB pensions to fund, this depends on level of initial investment and rate of return. The assumed rate if return indicates underfunding or risky investment, or both. A pension fund can’t survive “bad years” like a household can–it has obligations every year.

            I invest plenty, but I’d never suggest that playing the stock market is a rational basis for a national policy to provide for the aged. People who have the disposable income to invest heavily and accumulate assets can make it, but a person with low income will never get there.

  3. tgb says:

    Lets go back to what both parties supported which was the Pre Gov Ridge multiplier of @2.0 % year multiplier rather than Ridges 2.5%. He did to buy state workers and it did not work any way you look at it. He was wrong to buy off people and he was paying the bill he created. That being sid do not State Workers pay social security. So the get the pension plus social security. that is why so many go at 55 to another job or truly retire. 30 years at 2.0% is still 60 % of you wages. You only take home 75% when you work. If they get social security at 62 they may be ahead of the game. So throw in the present 2.5% multiplier and that situation of 30 years gets you 75% of your annual wage. We cannot afford it.

  4. phillydem says:

    One thing to keep in mind that in 2001, when contributions were allowed to lapse and pensioners got raises, PSERS/SERS was not only fully funded, but over-funded. It turned out to be a bad assumption that the stock market/investments would only go up and never down, but it is understandable why contributions were cut.

    Many school boards were short-sighted and instead of lowering contributions, stopped them completely, using the savings for other things.

    I suggest smoothing/leveling contributions over the next decade. After all, the the pension fund went from over to underfunded in the same time. From my own experience in gov’t, I know it’s simply unrealistic to project out 10, 20, 30 years with any certainty at all.

    • Jon Geeting says:

      Definitely agree about the silliness of 10 year (and beyond) projections. How much more in revenue/cuts do you think we’d have to come up with in a ‘smoothing’ scenario?

      • phillydem says:

        Honestly, I don’t know. A lot depends on how the economy fares.
        But, I think as the current “shortfall” impacts property taxes, it’s better to smooth out the peaks and valleys over time. Some years, the districts will collect too much money and sometimes too little, but it should all work out in the end. I think it’s better to tell people, you have to pay x amount every year for the next 10 years rather than trying to hold the line on taxes which causes teacher layoffs and other cutbacks or raise them so much at once everyone gets mad. If they have certainty, people can plan their budgets. I’d also be for a mandatory minimum yearly contribution should PSERS again become “fully funded” to preclude another recurrance of school boards/state shirking their responsibility.

        I also find it interesting that despite the stock market performance over the past few years, there’s still a problem with “underfunding”.
        I mean the losses from 2001 and 2008-9 should have been recovered by now. I know my investment accounts have all rebounded nicely. It might be interesting for KP to get Rob McCord’s take.

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  6. Hank says:

    I would look at cutting down the $770 million in fees per year that the state pension system is paying to Wall Street asset managers to earn returns that seem to be less than what the state could get investing in low fee index funds.

    Finding a few hundred million in savings per year without compromising returns would be a great way to sure up the pension fund balances.

    Sources:

    http://www.philly.com/philly/blogs/inq-phillydeals/PSERS-to-remove-investment-data-from-state-Web-site.html

    http://articles.philly.com/2013-03-11/news/37600557_1_asset-managers-lower-management-fees-pension-reform

    http://www.ibtimes.com/rhode-island-treasurer-gina-raimondo-wants-minimize-attention-wall-street-managers-1642888