Friday, May 15, 2015

Economist: Under GOP Pension Plan, State Pays More to Get Less

Dan Heyman, Public News Service (PA)

PHOTO: A state Senate plan to shift to privatized public employee pensions would be a bad deal for retirees and would ultimately would leave Pennsylvania taxpayers on the hook, analysts say. Picture courtesy of the state of Pennsylvania.
PHOTO: A state Senate plan to shift to privatized public employee pensions would be a bad deal for retirees and would ultimately would leave Pennsylvania taxpayers on the hook, analysts say. Picture courtesy of the state of Pennsylvania.
HARRISBURG, Pa. - Privatized pensions - such as those pressed by state Senate leaders - actually have higher fees and lower returns, analysts say.

The Republican lawmakers say they won't approve a state budget until Gov. Tom Wolf accepts their plan for dealing with Pennsylvania's $50 billion pension debt. Their proposal includes benefits cuts for current retirees and privatized 401(k)-style retirement plans for future retirees. But economist Stephen Herzenberg, executive director of the Keystone Research Center, said those plans cost more in fees and return less in benefits. He said they would leave former state workers and taxpayers on the hook.

"So when it costs more and you get lower returns, it's not rocket science," he said. "It costs roughly twice as much in contributions to get the same going into the retirement benefits."

Republicans in the Legislature say the state can't afford the current system. Teacher groups and others say the real problem isn't the pensions. For years, they say, the Legislature failed to kick in its full share, shifting the money to corporate tax cuts.

According to studies cited by the research center, traditional pensions historically have better returns than 401(k)-style plans. Herzenberg said traditional pensions can negotiate a better deal than can individuals investing their own money. He said privatizing a traditional plan puts the teachers and state employees at the mercy of Wall Street.

"It's essentially a transfer from Main Street retirees to Wall Street financial firms," he said.

Herzenberg said three states have tried privatizing pensions and it hasn't gone well in any of them.

In contrast, Wolf favors a plan to try to negotiate better fees for the current system, and selling bonds to reduce its debt some. The governor says the bonds could be funded by modernizing the state liquor stores.

Herzenberg said the governor's plan is a good one that would give previous reforms time to work.

"A modest bond that buys down the debt a little bit, especially when interest rates are really low, possibly with saving money in investment fees, makes total sense," he said.

About a half million former public school teachers and other former state employees get on average about $25,000 a year in benefits from the state's two pension systems. The typical public employee pays about 7.5 percent of his or her wages into the system.

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