Rewarding Hard Work

Give Pennsylvanians a Shot at Middle Class Retirement

State policy makers must work with the public sector employers and the private sector to bolster pension plans.

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After working for decades, Pennsylvania’s teachers and firefighters, police officers and nurses, and courtroom officials should look forward to enjoying a secure middle class retirement. Retirement security, though, has already eroded in the private sector because some employers have walked away from a shared obligation to fund a secure retirement.

Today, half of Pennsylvania’s private sector employees get no retirement savings through their employers. And now, in the public sector, calls have been made to follow private sector trends and to replace the pension plans that public sector workers have been counting on with substantially weaker retirement plans. Such a move by the state would deny these critical public servants the middle class retirement for which they’ve been planning.

A new report, “Rewarding Hard Work: Giving Pennsylvania Families a Shot at Middle Class Retirement Benefits,”  by Christian Weller, Senior Economist at the Center for American Progress, and Mark Price, Labor Economist at Keystone Research Center, offers clear and pragmatic policy alternatives to protect and expand pension benefits.

Instead of engaging in this race to the bottom alongside the private sector, state policy makers should be working with the private sector to bolster its citizens’ pension plans. Pennsylvania’s policymakers should step up to the plate and offer some retirement income security to public and private sector workers by:

  • Shoring up public sector employees’ traditional defined benefit (DB) pensions, which provide retirees with a guaranteed amount of money each year based on years of service, retiree’s final annual earnings, and the age when the worker first takes the pension.
  •  Making more widely available private sector 401(k)-style defined contribution (DC) plans, which pay out upon retirement based on how much employers and workers contribute to a retirement fund that’s invested in stocks and bonds.

Achieving these two progressive objectives is necessary to ensure Pennsylvania’s current and future retirees a comfortable middle class retirement. And these objectives are not just the fair and responsible thing to do; they are also both affordable and critical to Pennsylvania’s future economic growth.

Stronger public sector DB pensions can be funded responsibly through sensible reforms that in turn would strengthen Pennsylvania’s economic competitiveness. State government has the authority to strengthen DB pensions for about 600,000 workers in Pennsylvania’s public sector and can do so without massive new fiscal outlays. Sharp drops in the stock market after 2000 created a misperception that public sector DB pensions will be an unsustainable drain on public dollars, but sensible reforms would enable state governments to maintain DB pensions for state and local government employees.

These reforms would guarantee regular contributions, thereby reducing the pressure on the state to increase pension contributions when economic times are bad and encouraging the state to raise contributions when times are good. These reforms would be good for retirees, employers, and the state economy because they would give a typical public sector worker in Pennsylvania an adequate, although not generous, retirement income equal to about 75 to 80 percent of their preretirement income, and maintain the ability of state and local governments to attract and retain talented professionals, who would otherwise be drawn to higher paying jobs in the private sector if public sector DB pension benefits are allowed to deteriorate.

These reforms would also allow DB plans to retain their valuable role in the economy. Well-funded pension plans invest in many assets and they are a particularly important source of financing for venture capital firms. Venture capital firms finance small privately held startup companies in exchange for an equity stake in the companies. Pennsylvania venture capital firms in 2005 received 20 percent of their resources from the DB pension plans for state government employees.

More widely available private sector DC pensions can also be offered with help from the state government, ensuring that more Pennsylvanians save for their retirement and creating more pension fund money for investment in the state economy. To improve private sector pension coverage, Pennsylvania should make it easier for small employers and individual workers to enroll in DC plans. With these plans, individuals and their employers would gain much-needed access to retirement savings vehicles.

Specifically, the state government could provide low-cost access for employers to establish 401(k)-style DC retirement savings vehicles for their employees, an approach previously recommended by the Keystone Research Center that requires that all employers with 10 or more employees to offer their employees automatic deductions into Individual Retirement Accounts, or IRAs, just as many employers today offer direct deposits for employees’ paychecks.

Pennsylvania’s policymakers must represent the interests of its hard-working citizens. They should not lower Pennsylvanians’ chances of a secure middle class retirement but rather strengthen retirement security for public-and private-sector employees alike. The state government has an obligation to do so, not just as a matter of fairness, but to ensure that the state has the human resource management tools necessary to attract and retain a skilled workforce with the increased savings needed to invest in a growing economy.

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Christian E. Weller

Senior Fellow