The Keystone Research Center (KRC), a Pennsylvania-based policy and budget organization, is out with a new brief analyzing pension reform proposals in Pennsylvania. Three quick thoughts:
- Their analysis is extremely incomplete. The brief provides examples of the pension reform’s effects on a narrow subset of workers—those acquiring at least 20 to 40 years of experience—but it never talks about what would happen to employees who stay less time. That’s a fatal flaw, at least in the case of teachers, because Pennsylvania’s pension system assumes more than three out of four Pennsylvania teachers leave within 10 years, let alone 20! The Keystone brief never mentions these people, but any serious analysis of pension reforms should include the effects on the vast majority of workers.
- When a pension analysis only focuses on 25- or 40-year veterans, it ignores what happens to those who will only accumulate a modest amount of service time. Pennsylvania currently requires teachers to stay for at least 10 years in order to qualify for a minimum pension benefit. Three-quarters won’t make it; they’ll leave their service in Pennsylvania public schools with no employer-provided retirement benefit. In contrast, the pension reform under consideration would place teachers in a hybrid pension/401k-style plan that offered employees their employer's contributions at the end of three years. The KRC analysis doesn’t include this among its list of benefits.
- Bizarrely, the brief presents potential salary increases as a bad thing. It identifies “hidden wage increases” as a cost because employers may respond to lower pension contributions with higher salaries. Because wages are subject to federal income tax whereas pension contributions are not, the brief says pensions are a “less efficient tool for improving retention.” This is crazy talk. First, consider the counter-factual: If an employer decided to compensate an employee entirely through a pension system, it would be more efficient from tax purposes, but it would mean the employee had zero cash to spend on rent, food, or any other living expenses. At some point there’s a tipping point where tax “efficiency” is no longer as important. Second, the entire concept of efficiency is moot if workers don’t value what comes out of it. Most workers are aware of and appreciate the flexibility of $1 in cash far more than $1 in benefits. In Pennsylvania, employer contributions currently sit at 16 percent of teacher salaries but could potentially rise as high as 20 or 30 percent in the near future. Teachers may actually prefer to have the cash.