PPR (2) Choices

At 3 pm today the bill will be signed by the governor and, according to the actuarial note on the Pennsylvania Pension Reforms (PPR), the state will save some money on contributions and eventually reduce unfunded liabilities. This will be accomplished by having future participants make larger employee contributions for lower benefits.

Current plan benefits:

The retirement plans administered by the Systems are defined benefit (DB) plans that provide retirement benefits based on the product of three components: (1) a member’s final average salary, (2) a member’s years of accumulated service credit and (3) a benefit accrual rate, or multiplier. For example, a retiree with 30 years of service, a final average salary of $60,000 and a multiplier of 2.0% would receive an annual retirement benefit of $60,000 x 30 x 0.020 = $36,000, or $3,000 per month.

The retirement benefits administered by the Systems are funded through employee contributions, investment earnings and employer contributions. The general benefit designs of the Systems remained largely unchanged from the time the authorizing statutes were codified in the 1970s until the enactment of Act 9 of 2001. That act increased the employee contribution rates by 1.25 percentage points, reduced the vesting period from 10 to 5 years and increased the benefit accrual rate, or multiplier, from 2.0% to 2.5%. However, Act 120 of 2010 implemented provisions that negated or reversed most of those changes. For new employees, the act reduced the benefit accrual rate (2.5% to 2.0%), increased the vesting period (5 to 10 years) and increased the superannuation age (62 to 65), but retained the higher employee contribution rates. The provisions of Act 120 remain in place for new members of PSERS (hired after June 30, 2011) and SERS (hired after December 31, 2010). For new members, the relevant provisions are as follows:

  • The standard employee contribution rate, as a percent of compensation, is 7.5% (PSERS) or 6.25% (SERS). The employee may elect a higher contribution rate in exchange for a higher benefit accrual rate.
  • Employer contributions are actuarially determined. The standard benefit accrual rate, or multiplier, is 2.0%. However, within 45 days of first be- coming a member, the employee may elect a 2.5% benefit accrual rate in exchange for an employee contribution rate of 10.3% (PSERS) or 9.3% (SERS).
  • Final average salary is based on the three highest non-overlapping years of service.
New plan designs applicable to most public employees hired by school or state employers beginning July 1, 2019 (PSERS) or January 1, 2019 (SERS):
 Option 1: Default Side-by-Side Hybrid Plan
If no election is made from the three options, new school employees become members of “Class T-G,” and most new state employees become members of “Class A-5.” Members of these classes participate in both a DB and DC plan. Under this option:
  • Employees contribute a total of 8.25% of compensation, which would be divided between the DB and DC components as follows: PSERS members 5.5% (DB) and 2.75% (DC); SERS members 5.0% (DB) and 3.25% (DC).
  • For the DB component, the employer contribution rate would be actuarially determined. For the DC component, the employer contribution rate is 2.25% of compensation.
  • A multiplier of 1.25% applies to the DB component of the plans.
Option 2: Alternative Side-by-Side Hybrid Plan
New members may elect an alternative side-by-side hybrid benefit plan. Under this plan, new school employees become members of “Class T-H,” and most new state employees become members of “Class A-6.” The DB component contains lower employee contribution and benefit accrual rates, and the DC component contains a lower employer contribution rate. Under this option:
  • Employees contribute a total of 7.5% of compensation, which would be divided between the DB and DC components as follows: PSERS members 4.5% (DB) and 3.0% (DC); SERS members 4.0% (DB) and 3.5% (DC).
  • For the DB component, the employer contribution rate would be actuarially determined. For the DC component, the employer contribution rate is 2.0% of compensation.
  • A multiplier of 1.0% applies to the DB component of the plans.
Option 3: Stand-alone Defined Contribution Plan
In lieu of the hybrid plans, the bill provides for a stand-alone DC benefit plan. This plan would not include a DB component, and is similar to the federal government’s Thrift Savings Plan or 401(k) plans. New school employees and most new state employees would contribute 7.5% of compensation, with an employer contribution of 2.0% (PSERS) or 3.5% (SERS) of compensation.

So how is a participant to choose? Let’s look at a chart:

What hits you is how little, in theory, a new participant would get by choosing option 3. In exchange for Employee Contributions of 7.5% of salary the Employer Contributions will be 2% in PSERS and 3.5% in SERS which is about what they would be under the Hybrid Default and Alternative options. Could this be to discourage participants away from the DC-Only Plan since that would mean none of the Employee Contributions would be run though the sausage factory that spits out the actuarially determined contributions which this legislation is primarily designed to keep down?

23 responses to this post.

  1. Posted by Anonymous on June 12, 2017 at 10:27 am

    What would PA’s revised depletion date be based on projected (however inaccurate) savings and historical employer contributions as a percent of their ARC?

    Reply

  2. Posted by Anonymous on June 12, 2017 at 1:39 pm

    Interestingly, while most Public Sector Unions/workers hold-their-nose at the new hybrid Plan thinking it’s woefully inadequate, it’s “generosity” is right on par with typical Private Sector Plans (few as there are still granting accruals today).

    While employees in Corporate-sponsored DB Plans typically do NOT contribute to their DB Plans, their Plans do NOT get COLA-increases, whereas the Public Sector Plans do. While not a perfect offset, the 5% to 5.5% employee DB Plan contribution is quite close to the cost of of adding the COLA benefit, so it’s a wash.

    *************************

    Bottom line ……….. It took a massive financial crisis for PA to finally reduce the pensions granted their workers to a level that is STILL so costly that Private Sector Plans have been abandoning it for the past 2 decades.

    Reply

  3. Posted by Anonymous on June 12, 2017 at 2:11 pm

    OH still gets 3% COLA and health care, yet better funded than NJ?? Average active salaries and resultant retiree benefit differential doesn’t account for NJ underfunding ratio but lack of employer contributions do!

    http://www.dispatch.com/news/20170612/ohios-public-employee-pensions-face-cutbacks

    Reply

    • Posted by Anonymous on June 12, 2017 at 2:57 pm

      ALL it means it that Ohio’s Public Sector Unions and their Union-BOUGHT Elected Officials have better succeeded in unjustly stealing the wealth of Private Sector Taxpayers to fund the grossly excessive pensions (AND benefits) promised it’s workers.

      BRAVO for NJ’s Taxpayers for have NOT been so suckered !

      Reply

      • Posted by Anonymous on June 12, 2017 at 3:03 pm

        And OH is RED and NJ BLUE go figure?

        Reply

      • Posted by Anonymous on June 12, 2017 at 3:08 pm

        AND …..

        As much as people love to hate Gov. Christie, HE ALONE has saved NJ Taxpayers BILLIONS, just ONE example of which is getting the years-long suspension of COLAs. Had they NOT been frozen, NJ’s pension Plan would have paid out an ADDITIONAL $15 Billion over the ensuing years……. $15 BILLION !

        And even though the cap has some problematic holes in it, how about the 2% cap on salary increases that Christie instituted. It was going up a GREAT DEAL faster than than before Christie put an end to the thieving Unions hop-scotching each other with arbitration awards.

        Hate him for his stupid actions (Bridgegate, abandoning NJ to run his Presidential campaign, supporting Trump, etc.) but THANK HIM for putting the brakes on NJ’s insatiably GREEDY Public Sector Unions.

        ********************

        And of course it was sooooooooooooo pleasurable to watch him tell-off the obnoxious NJ teacher’s Union..

        Reply

        • Posted by Anonymous on June 12, 2017 at 3:23 pm

          And he didn’t contribute what he agreed to; as a prosecutor he’d know he entered into an unenforceable contract.

          Wonder if the P&FRS, at this point forget the NJEA, will be accepting promise letters from triple dipping Kim on how sacred their P&B’s are?

          Reply

          • Posted by Anonymous on June 12, 2017 at 3:36 pm

            When a Union demands a “promise” (from a Politician seeking to be elected) that an undeniably excessive and unaffordable pension Plan will NOT be reduced, they DESERVE being lied to.

          • Posted by Anonymous on June 12, 2017 at 4:39 pm

            Point noted. Lessoned learned?

    • Posted by George on June 12, 2017 at 7:11 pm

      Ohio’s five public pension funds have $192 billion in assets and last year paid out more than $15 billion in pension benefits and $1.1 billion in health-care benefits.

      Ohio’s four largest public pension plans are severely underfunded based on traditional metrics of pension solvency, and they are only guaranteed to be able to finance their promised obligations for roughly the next decade without additional taxpayer contributions,”

      Reply

  4. Posted by George on June 12, 2017 at 7:16 pm

    It looks like the hybrid plans are a no brainer, unless you will likely not stay long enough to be vested in the DB plan.

    Older new hires, or retirees still employed (double dippers) might be best off with option DC.

    Reply

    • Posted by Anonymous on June 12, 2017 at 7:42 pm

      Guess that’ll be Kim’s choice – LOL!

      Reply

    • Posted by George on June 13, 2017 at 1:01 pm

      Hey, let’s say it is your first day on the job. You know you are going to be criminally corrupt, but don’t know if you will be caught. Which plan should you choose? Option 3 is for people who don’t qualify for 1 or 2, or perhaps don’t believe the defined benefit plan will survive your lifetime.

      Reply

  5. Posted by dentss dunnigan on June 13, 2017 at 8:35 am

    • Posted by Anonymous on June 13, 2017 at 10:03 am

      Yup and Kimmie supports the legislation Christie vetoed on control of the P&FRS. What a surprise from a triple dipping retired sheriff with a retired judger for a hubby. Get ready the fun(d)s about to begin!

      Reply

      • Posted by Anonymous on June 13, 2017 at 12:15 pm

        As a Public Sector worker, YOU may consider it “fun” (that “joke” of an arbitration process with each town’s employees hop-scotching on the raises given to the LAST town to get them), the Taxpayer’s should recognize what that process really is……… an enormous unjustified rip-off of the taxpayers.

        Public Sector wages should be determined in arms-length negotiations as done in the PRIVATE Sector, where each side is truly looking out for it own best interests ……… and NOT basing Public Sector wages only the wages paid other overcompensated PUBLIC Sector employees.

        Reply

      • Posted by Anonymous on June 13, 2017 at 12:20 pm

        Hardly but back to your alleged ‘free market’ argument that ALSO applies to someone choosing their State/municipality of residence.

        Reply

  6. Posted by Anonymous on June 13, 2017 at 12:32 pm

    Interesting article. While it describes Minnesota’s Public Sector pension-driven progression into service insolvency and endless tax increases, Minnesota could easily be replaced with almost any of the other 50 States.

    http://www.fiscalexcellence.org/policy/pension-legacy-costs/pensionland.html
    ***************************

    Public Sector Unions are a CANCER inflicted upon civilized society and should be outlawed.

    Reply

    • Posted by Anonymous on June 13, 2017 at 12:44 pm

      Well with the advent of an Obamacare repeal your alleged situation, if true, is considered a pre existing condition and therefore exempt from coverage.

      Reply

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