How can Pennsylvania cities turn around their pension systems?

Seeking a better understanding of Pennsylvania’s issues and proposed solutions? Sometimes, complicated jargon and concepts can get in the way. That’s why we started Explainers, a series that tries to lay out key facts, clarify concepts and demystify jargon. Today’s topic: Pensions.

One in a series explaining key terms and concepts of Pennsylvania government. Today’s topic: Pensions.

It’s simple, at least in theory. Pennsylvania cities could start to adequately fund their pension systems. They can do that in a few different ways. None of these is particularly popular with taxpayers, so this issue is no fun for politicians. And that, of course, is why the underfunded pension plan is a problem much easier to fix in theory than in the real world.

If local governments want to keep their retirement benefits the same, they can cut municipal services or raise revenues to pay for them. The latter can include raising taxes, eliminating tax breaks or doing a better job collecting the taxes that are already on the books.

Philadelphia’s City Council has proposed using a portion of a sales-tax extension to shore up its pension fund, but that requires state permission.

Cities can also reduce retirement benefits. For instance, cities can raise the age at which a public employee is allowed to retire. They can also scale back cost-of-living adjustments or change the formulas used to calculate pensions.

Critics of these proposals point out that some cities have endured costly legal battles when they’ve cut benefits for current workers. Public employee unions point out that their members earned those benefits; cutting pensions, they say, is reneging on a debt just the same as failing to pay off a municipal bond.

Another controversial option is changing the pension plans offered to employees. Many cities across the nation have begun to push workers in “defined contribution” and “hybrid” plans instead of traditional pensions.

In “defined contribution” plans, employers typically promise to save a predetermined amount of money annually for pensions but do not guarantee any set benefit. These plans are more risky for employees, and less risky for employers. In a “hybrid” plan, an employee is usually enrolled in both a reduced “defined benefit” plan and a “defined contribution” plan.

Proponents of “defined contribution” plans say they have the virtue of operating on a pay as you go basis. “Defined benefit” plans enabled governments in past decades to save on costs and taxes in the moment by pawning pension costs off on future governments and taxpayers.

Critics of “defined contribution” plans, including many labor unions, say they are more costly to employers in the long run, mostly due to additional fees.

Ultimately, Pennsylvania cities will likely use a combination of these changes to shore up their pension systems.

Did this article answer all your questions about pensions? If not, you can reach Holly Otterbein via email at hotterbein@whyy.org or through social media @hollyotterbein. Have a topic on which you’d like us to do an Explainer? Let us know in the comment section below, or via Twitter @Pacrossroads.