A Looming Crisis?

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Prior to 1950s few people had pensions Most worked until they died

Initial issue: company specific or industry-wide? Labor wanted industry-wide (but lost) G.M. first offered company pensions in

1950▪ Set the trend

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Defined BenefitFormerly the most common

Defined Contribution Now the most common

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State Employee Retiree System (SERS) Most Commonwealth Employees Funded by the Commonwealth, Employee

Contributions, and Investment Income Public School Employees’ Retirement

System (PSERS) All Public School Teachers Funded by the Commonwealth, School

Districts, Employee Contributions ,and Investment Income

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Guarantee a fixed monthly income upon retirement, usually for life Minimum number of years to be

vested Amount determined by formula▪ Years of service▪ Average salary at retirement▪ A “multiplier”

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Employer has life-long obligation

The Social Security system provides a form of a defined benefit retirement plan

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Annual Pension Equals

(Years of Service) X (Average Salary) X (Multiplier)

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Years of Service Often allow credit for other employment or military service

Allow participants to buy service years

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Average Salary PSERS and SERS use average of

highest 3 years Extra pay included in the average▪ Overtime▪ Holiday Pay▪ Extracurricular Activities▪ Developing Curriculum▪ Attending Workshops

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Multiplier Most PA employees have a multiplier of

2.5% Suppose 35 years of service and an

ending salary of $80,000 (PS 10) Pension = $70,000 per year▪ Over 20 years the cost is $1,400,000

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AverageSalary

ServiceYears

Multiplier AnnualPension

LifetimeCosts

$65,000 35 0.025 $56,875 $1,137,500

$70,000 35 0.025 $61,250 $1,225,000

$75,000 35 0.025 $65,625 $1,312,500

$80,000 35 0.025 $70,000 $1,400,000

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AverageSalary

ServiceYears

Multiplier AnnualPension

LifetimeCosts

$80,000 20 0.025 $40,000 $800,000

$80,000 25 0.025 $50,000 $1,000,000

$80,000 30 0.025 $60,000 $1,200,000

$80,000 35 0.025 $70,000 $1,400,000

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AverageSalary

ServiceYears

Multiplier AnnualPension

LifetimeCosts

$80,000 35 0.010 $28,000 $560,000

$80,000 35 0.015 $42,000 $840,000

$80,000 35 0.020 $56,000 $1,120,000

$80,000 35 0.025 $70,000 $1,400,000

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AverageSalary

ServiceYears

Multiplier AnnualPension

LifetimeCosts

$50,000 35 0.01 $17,500 $350,000

$50,000 35 0.015 $26,250 $525,000

$50,000 35 0.02 $35,000 $700,000

$50,000 35 0.025 $43,750 $875,000

There are about 110,000 active SERS members

If the average salary at retirement is $50,000, then Increasing the multiplier from 2.0% to 2.5% results in an increase of: 110,000 X $175,000 = $19.25

billion

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Pittsburgh’s Going to the Super Bowl!!!

DB plans are workable as long as there are increasingly more workers than retirees When Bethlehem Steel went bankrupt in

2001 it had 7.5 dependents for each worker In 1962 GM had 1 retiree to 11.6 workers:

today it has 3.2 retirees per worker There are about an equal number of SERS

workers an d retirees (110,000) There are 264,000 active PSERS members

and 168,000 retirees DUQUESNE UNIVERSITY

The Demographics are working against DB plans Market realities have caused most

private sector firms to abandon them.

Very similar to the problems facing Social Security

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Year Definedbenefitplans

Definedcontribution

plans1985 80% 41%1986 76 471988 63 451989 63 481991 59 481993 56 491995 52 551997 50 571999 42 522000 36 50

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Employee Contributions SERS 6.25%. PSERS 7.5%

Returns on investments Expected 8.5% 1950 – 05: S&P up 7.94% 1950 -09: S&P up

6.75% Commonwealth contributions vary

When returns are low contributions must increase

In June 2008 the Governor estimated state contributions would need to more than double by 2012

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▪ Employer and Employee each make a contribution to an investment fund▪The usual is a 401(k) plan▪National average employer contribution is about 3.0% of salary▪Most employees “manage” their account▪The employer obligation ends at retirement▪George W. Bush’s idea for SS

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▪The cost of a defined benefit plan can be less than, the same as, or more than a defined contribution plan -depending on the rate of return▪One advantage of the defined contribution plan is that the cost can be predicted

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▪Gradually shift to a defined contribution plan▪Gradually impose the state and local income tax on SERS & PSERS income▪ Increase the age for full DB pensions – similar to Social Security

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