Facts About Act 120 and Pension Reform
What is the problem?
Pennsylvania faced an imminent “pension spike,” meaning employer (the state) contribution rates were headed to a 500% increase, which would have cost $4.75 billion. This was the result of the decisions of past General Assemblies to delay payments to the State Employee Retirement System (SERS) and the Public School Employee Retirement System (PSERS). SERS and PSERS became dangerously underfunded and their financial stability was threatened. While employees in the systems held up their end of the deal by making a 6.25% contribution for state employees and a 7.5% contribution for school employees, school districts and the Commonwealth did not always. This has resulted in an unfunded liability of about $50 billion. This number is a bit of a misnomer, as it is the amount of money the state would owe if every employee in the system retired on the same day, which would never happen. However, it is still an issue that needs to be addressed and a debt that needs to be paid down. So what’s the solution?
What is the solution?
The solution is Act 120, which was passed on a bipartisan basis in 2010. Act 120 is essentially a payment plan that made adjustments to the pension system that was already in place so employees can continue to receive defined benefit plans while gradually paying down the debt that built up over the years of underfunding.
How does the solution work?
Act 120 saves taxpayers $19 billion over the next 30 years. These savings are achieved through mutual sacrifice, which means new employees (those who start on or after January 1, 2011, for state employees and July 1, 2011, for school employees) pay more money for fewer benefits. New employees must work 10 years to be vested instead of five years, retirement age has increased from 62 to 65 and benefits have been capped at 100% of final average salary. The sacrifice becomes mutual by putting an end to employers’ ability to take a contribution “holiday.” Just like workers, employers must contribute to the system every time around. Act 120 also protects taxpayers. If SERS and PSERS do not reach their assumed rates of return, the employee contribution rate will increase by a maximum of 1% so taxpayers are not left to foot the bill.
Is Act 120 working?
Yes. Currently, about 20% of the workforce is made up of new employees who fall under Act 120. They are still going to get defined benefit pensions when they retire, while maintaining the system for current and future employees. Act 120 is gradually paying off the debt and taking some burden off the taxpayers. This is a much better plan than the alternative of a 401(k)-style plan or even a hybrid plan with elements of both 401(k) and defined benefit. With Act 120, defined benefit money stays in the retirement system, which pays down the unfunded liability and guarantees a secure retirement for thousands of Pennsylvanians.