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Step One: Stop Digging
Pennsylvania Passes Pension “Overhaul”

After years of kicking the can down the road, Pennsylvania has enacted legislation that lawmakers hope will put a significant dent in future public pension funding shortfalls:

The compromise measure will move most future state and public school workers at least partly into 401(k)-style plans to help shore up the deeply underfunded pension system and shift market risk from taxpayers to employees. An independent analysis estimates the state will save $5 billion to $20 billion over 30 years, depending on investment performance.

On the one hand, it’s good that state lawmakers have woken up to the fact that the first step of getting out of a pension hole is to stop digging. This measure will help Pennsylvania limit the growth of its massive, $62 billion pension debt.

It’s also a better fit for a 21st-century employment scene increasingly characterized by career changes and job flexibility. The state’s old, traditional defined-benefit pensions only vest after ten years, tying workers down to jobs they may no longer want or be suited for. Workers with a portable, defined contribution system—properly administered—benefit from the added career mobility.

But by and large this legislation isn’t as big a step forward as lawmakers and Pennsylvania’s Governor Tom Wolf are making it out to be. The new system does little to address the problem of debts racked up by the kind of public pension shenanigans that should be all-too-familiar to Via Meadia readers:

Pennsylvania’s pension crunch dates to a 2001 move by the legislature to sweeten benefits, combined with subsequent underfunding by state government and school districts, and weak investment returns, particularly after the 2008 financial crash.

So the digging may have stopped, but Pennsylvania’s hole is still a deep one.

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  • FriendlyGoat

    And the march to telling kids “the more risk shift you receive in life, the more you’ll enjoy your freedom” goes on. Private-sector people had this shoved at them decades ago and many of them bought it even as they simultaneously grasp about now for lifelines that aren’t coming on how to make their country great “again”.

  • Suzy Dixon

    DC plans only work well if you pay more than just a few percent each month, and you have to watch your investments.

    • Unelected Leader

      You have to do three basic things to get the most out of it. 1. Contribute around 10% (if you can do a little more then great). 2. Pay the taxes up front. Waiting is just dumb and means you’ll get hammered later when you cash out (especially if it grows well!). 3. Pay attention, as you say. Too many wake up after 20 years and realize their fund/s haven’t been managed well, and their investments haven’t performed nearly as well as perhaps some of their more attentive friends and family’s.

      • Suzy Dixon

        Yes, I was so happy when my company started offering a ROTH 401K. I immediately made the switch from the traditional.

        • Unelected Leader

          And of course if the company matches, like up to 3%, then that will of course stay in the traditional 401k, and will be taxed later, but we should all be contributing more than that, and it can go into a ROTH 401k. So, by age 65 you can have like 95% of whatever is in there be pure growth.

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