Pennsylvania introduces 401(k)-style plans for government workers

The size of Illinois’ pension crisis requires even bolder pension reform that includes 401(k)-style plans for public employees.

Pennsylvania has joined the list of states that have introduced 401(k)-style reform plans for government workers.

On June 12, Pennsylvania Gov. Tom Wolf signed into law a pension reform plan that gives new state workers and teachers the option of joining a new stand-alone 401(k)-style plan or joining a new hybrid plan with pension and 401(k)-style components. Current state workers and teachers will also have the option to join the new plans.

Pennsylvania lawmakers have fought for years to pass pension reform. A full 401(k)-style plan was introduced in 2010 after a decade of disastrous pension “holidays” that skyrocketed Pennsylvania’s state pension debt to $70 billion in 2016 from just $7 billion in 2004. The stand-alone 401(k) plan and hybrid plan had been in limbo since 2015; the reforms underwent several changes and failures until this year.

Pennsylvania’s pension reforms are an encouraging sign for Illinois. Pennsylvania has a majority-Republican legislature and a Democratic governor, yet the state managed significant reforms.

Pennsylvania’s experience shows significant pension reform can happen even under divided government. The state’s politicians overcame the objections of anti-reform union groups and passed changes that give state workers more retirement freedom.

However, if Illinois lawmakers want to begin an end to the state’s pension crisis, their reforms will have to be even more comprehensive than Pennsylvania’s.

Only full 401(k)-style plans for new workers can begin an end to the pension crisis in Illinois.

Details of the Pennsylvania plan

Pennsylvania joins more than a dozen other states across the country that have enacted some form of a 401(k)-style reform plan.

Under the reform, new and current state workers and teachers have the option to join a stand-alone 401(k)-style retirement plan.

Each Pennsylvania state worker will set aside a total of 11 percent of his or her salary each pay period into his or her own 401(k)-style account. State workers will contribute a mandatory 7.5 percent of each paycheck, while the state will contribute 3.5 percent to workers’ accounts. Workers are vested in their 401(k) benefits within three years.

State workers also have the option to join a hybrid plan with pension and 401(k)-style components. Under the hybrid plan, workers get both a 401(k)-style account and a pension plan that accrues benefits at the rate of 1 percent a year. Workers contribute 4 percent of their salary to their pensions and 3.5 percent to their 401(k)-style accounts. The state contributes 2 percent to workers’ 401(k)s.

Workers also have the option of a second hybrid plan that accrues at 1.25 percent a year.

The options for Pennsylvania teachers are very similar to those offered to state workers.

In addition, the reform plan includes special “shared risk” and “shared gain” rules. Members are required to contribute 0.75 percent more of their salary in years when the actual investment returns on the pension plan are 1 percent or more below the assumed rate of return.

But if the actual investment returns on the pension plan are 1 percent or more above the assumed rate of return, members can contribute 0.75 percent less of their salary.

Those rules reduce the financial risk borne by taxpayers by at least 60 percent. Taxpayers don’t have to bail out 401(k)-style plans. And the “shared risk” and “shared gain” rules mean employees will share some of the burden with taxpayers when pension investments are bad.

Illinois’ bigger crisis calls for bolder reforms

Illinois needs far more comprehensive reforms to fix its pension crisis – the state cannot afford to perpetuate pensions under any form.

Illinois lawmakers have proved time and again they should not be the ones controlling the retirements of state workers. Enacting a hybrid plan would keep pensions alive for new workers, which means politicians would still have power over workers’ retirements.

Illinois and Pennsylvania have very similar populations. But Illinois’ pension crisis is far worse than the Keystone State’s own crisis by every measure.

According to data from a 2016 Hoover Institution report, Illinois has over $188 billion in unfunded pension and health care debt. Pennsylvania has less than half that at $70 billion.

And Illinois’ total accrued state and local pension debt is more than five times the size of its state and local government revenues. Pennsylvania’s state and local pension debt is less than 2.5 times the size of its combined annual revenues.

Illinois must enact reforms such as a full 401(k)-style plan to begin an end to its pension crisis.

401(k)-style reform for Illinois

Illinois’ solution to its own pension crisis is right under lawmakers’ noses.

A successful, stand-alone 401(k)-style plan for state university workers has been operating in Illinois for nearly 20 years and has over 20,000 members.

Illinois can begin an end to its current crisis if it expands that 401(k)-style plan to all state workers.

State Sen. Dale Righter, R-Mattoon, and state Rep. Jeanne Ives, R-Wheaton, have introduced comprehensive, constitutional 401(k)-style reform plans that do just that.

Under the lawmakers’ proposals, new state workers would be enrolled in a stand-alone 401(k)-style plan. Current workers would have the option to join the 401(k)-style plan as well.

Contributions are mandatory under these reform plans, just as they are in the university workers’ plan. State workers not covered by Social Security set aside 15 percent of their salary each pay period, 4 percent more compared with Pennsylvania’s stand-alone 401(k) plan. Each worker contributes 8 percent of each paycheck into his or her own 401(k)-style account, and the state matches that contribution with another 7.3 percent.

More robust contributions allow the 401(k)-style plans to provide at least $1 million in retirement funds for the average career government worker.

Each worker’s personal retirement account is portable. Workers can take their retirement funds wherever and whenever they want. And the plans don’t depend on IOUs from House Speaker Mike Madigan, Chicago Mayor Rahm Emanuel or Gov. Bruce Rauner.

Pennsylvania shouldn’t be the last state to enact pension reform. All Illinois has to do is expand the 401(k)-style plan for university workers to all state workers. Moving new workers to 401(k)s will slow down and eventually stop Illinois’ accrued pension benefits from growing. That will allow Illinois to begin paying down its unfunded pension debt.