Setting the Record Straight on Pensions

Government union leaders argue against meaningful pension reform with radical rallying cries like, “Your pension is under attack!” and mounds of other misinformation. Here's a quick fact check on some of the most common pension reform myths:

1. Myth: “Pension reform will cost taxpayers $40 billion.”

Fact: The Pennsylvania Employment Retirement Commission (PERC) estimates Senate Bill 1—passed by the legislature but vetoed by Governor Tom Wolf—would save taxpayers $10.1 billion over 32 years. The $40 billion figure refers to a different bill from a different legislative session. Moreover, the number is misleading because it assumes pension funds would generate a lower stock market return under the reform proposal.

2. Myth: “Defined contribution plans are bad for workers.”

Fact: If this were the case, unions would not offer defined contribution plans to their own employees. But they do. PSEA, SEIU, UFCW, AFSCME, AFT, AFL-CIO and PFT all offer a defined contribution plan, like a 401(k), to their employees, either alone or as part of a hybrid plan.

Source: U.S. Department of Labor form 5500 searchable database

3. Myth: “Defined benefit plans provide a superior retirement.”

Fact: The Pew Research Center suggests state workers who leave their jobs after 10, 15 and 18 years of service would enjoy higher retirement income under Senate Bill 1, relative to the current system. This is due to the design of defined benefit plans, which tend to backload benefits.

Defined contribution plans are more generous for workers who begin their careers late or shift to another job—in other words, for the vast majority of today’s workforce. For example, fewer than 25 percent of Pennsylvania’s teachers will stay in the school system long enough even to become vested in their pension.

4. Myth: “Defined contribution plans cost more to administer and provide inadequate investment returns.”

Fact: In practice, large defined contribution plans cost less to administer than the average public sector defined benefit plan, as highlighted in a new study by Dr. Josh McGee for the Manhattan Institute.

In fact, McGee points out fees for the Pennsylvania Public School Employees Retirement System (PSERS) have tripled the average cost of the largest defined contribution plans. Gov. Wolf, who has expressed concerns about the investment fees state pension plans pay each year, should take note.

McGee's study also finds that investment returns are similar for defined contribution plans and that most defined contribution plans offer annuities—providing predictable annual income.

The facts are clear: meaningful pension reform is a critical protection for union workers. It would fulfill promises to current workers while providing future workers a more secure and flexible retirement.