The Truth about the Pennsylvania State Employees’ Retirement System
For more than fifty years, the Pennsylvania State Employees’ Retirement System (SERS)
has provided career employees with modest, but meaningful, retirement benefits through a
defined benefit pension plan. SERS covers more than 100,000 active employees and currently
provides benefits to 100,000 retirees as well as their beneficiaries. SERS participants include the
employees of the Commonwealth of Pennsylvania and other public agencies.
Benefit Levels and Eligibility
On November 23, 2010, Governor Rendell signed legislation that preserves all the
benefits now in place for all current members but mandates a number of benefit reductions for
future members effective January 1, 2011. The Act creates a new “A-3” Class of Service for
future non-judicial employees entering SERS membership on or after January 1, 2011. As is the
case with most current SERS members, the new A-3 members will contribute 6.25 percent of
pay toward their benefit, however, they will accrue benefits at only 2.0 percent of their Final
Average Salary for each year of service (as opposed to the 2.5 percent accrual rate for most
current members.
That law also creates an optional new “A-4” Class of Service for future non-judicial
employees entering SERS membership on or after January 1, 2011. New members who choose
this option will contribute 9.3 percent of their pay toward their benefit in order to accrue
benefits with a 2.5 percent service credit multiplier. This higher benefit will be entirely funded
through the higher employee contribution rate; there will be no additional cost to employers.
The new law also increases the vesting period for A-3 and A-4 members to 10 years, as
opposed to five years under current law. Current employees become “vested” or have the
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right, after satisfying a minimum service requirement, to ultimately receive a pension benefit
regardless of whether the employee remains a member of the pension plan, after five years.
According to the Wisconsin Legislative Council’s 2008 Comparative Study of Major Public
Employee Retirement Systems, nearly three-quarters of the public plans surveyed require five
or fewer years of service to vest. Private sector plans also provide vesting after five years.
Current employees can typically retire at age 60 or after 35 years of service, whichever
is earlier. This requirement is in line with other public sector plans. In fact, because many public
sector jobs are physically or emotionally demanding and employees who hold those positions
are directly responsible for public safety and health, many plans provide that employees can
retire once the sum of their age and service equals 80. Nevertheless, under the new law normal
retirement age for most members in the new classes will increase from age 60 to age 65 with a
minimum of three years of service. For those members in the new classes in positions that
currently have an age 50 Normal Retirement Age, the age requirement increases to 55.
For retirees who received benefits from SERS in 2008, the average annual benefit was
$22,695 (SERS Fiscal Year (FY) 2009 Actuarial Report, p. 34). As part of the formula used in
calculating benefits, plans like SERS use a service credit multiplier. For most employees, SERS
uses a service credit multiplier of 2.5 percent. For example, the benefit for a hypothetical 20year SERS participant with a final average salary of $40,000 would be calculated in the following
manner:
$40,000 x 20 years of service x service credit multiplier of 2.5 percent = $20,000
Because participating employers can calculate each employee’s benefit, employers can
efficiently manage the workforce. On the other hand, 401(k) plan participants may invest too
little, or their investments may provide insufficient returns, thus preventing employees from
retiring. A recent calculation done by the Center for Retirement Research for Retirement USA
shows that the real retirement crisis in our country is the $6.6 trillion gap between current
savings and what Americans should have today to maintain their standards of living in
retirement (The Retirement Income Deficit, Retirement USA, October 2010). As a result,
millions of U.S. workers have already delayed, or are likely to delay, their retirement dates. This
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can complicate the employer’s role, forcing decisions with unpleasant consequences for
everyone. Even for those employees who have accrued what they believe may be sufficient
savings, there is often little incentive to retire.
Funding Sources
Revenues used to pay benefits come from three sources: employee contributions,
employer contributions, and returns on investments. Because SERS, like all healthy public sector
pension plans, receives the bulk of its revenues in the form of investment returns, the normal
cost (the cost of benefits earned in the current year) is a reasonable 15.8 percent of payroll.
The normal cost is borne by the employer, which pays about 9.5 percent of payroll, and
employees who pay 6.25 percent of each paycheck. As the chart below shows, however, in
recent years employer contributions have been well below the normal cost. From 1999
through 2008, employer contributions totaled a little less than $1.6 billion, representing 10
percent of total additions to plan net assets, compared to $2.9 billion or 18 percent of total
additions attributed to member contributions. The bulk of revenues came in the form of
investment returns: $11.4 billion (or 72 percent) of total additions came from investment
earnings (SERS Comprehensive Annual Financial Report for Fiscal Year ending December 31,
2008, p. 3).
Annual Contributions to SERS, 1999 - 2008
Year
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
10-year total
Employee
Contributions
$224,928,000
231,666,000
240,528,000
304,233,000
308,014,000
309,923,000
305,624,000
317,790,000
333,818,000
336,833,000
2,913,058,000
Employee
Contribution as %
of Pay
5.00
5.00
5.00
6.25
6.25
6.25
6.25
6.25
6.25
6.25
Employer
Contributions
$270,718,000
168,002,000
76,710,000
50,831,000
68,604,000
106,703,000
148,375,000
196,420,000
243,936,000
235,288,000
1,565,587,000
Employer
Contribution
as % of Payroll
5.00
1.39
<1
<1
1.07
2.03
3.02
4.02
4.04
4.04
Source: Schedule of Trend Data, page 76 of FY 2008 CAFR.
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SERS is Financially Sound
There have been some recent claims that public employee retirement systems across
the country are facing a financial crisis. These claims are rarely true, and they are not true of
SERS. It should come as no surprise that the 2008 market downturn adversely impacted all
investors. What is surprising is that some individuals fail to account for the fact that defined
benefit plan funding is structured to be carried out indefinitely. SERS is designed for the long
haul and does not have an investment horizon like defined contribution savings plans that cover
individual employees.
As of December 31, 2009 SERS held net assets of more than $30 billion. Based on the
actuarial value of those assets, at that time SERS had a funded ratio of 84.4 percent. According
to a recent survey by the Center for State and Local Government Excellence the national
average for large public sector plans was 78 percent as of June 30, 2009; most experts
recommend a pension plan maintain a funding ratio of 80 percent or higher. A plan’s funding
ratio is simply a comparison of assets to accrued pension obligations. A retirement system’s
liabilities are amortized over time – similar to paying off a mortgage. In other words, a plan’s
funding status is a snapshot that captures a government’s ongoing effort at one point in time to
fund its future pension liability. If a state is consistently making its annual required contribution,
its pension plan can have a funded ratio below 100 percent yet still be on track toward full
actuarial funding. SERS’ funding ratio compares very favorably to the funding ratio of other state
plans in the region:
System
New York ERS
Pennsylvania SERS
Virginia SRS
Ohio PERS
West Virginia PERS
New Jersey PERS
Maryland SRS
Rhode Island ERS
Kentucky ERS
Connecticut SERS
Funded Ratio
100
83.5
77.6
71.5
65.9
64.9
63.9
58.0
46,7
43.4
Source: The Funding of State and Local Pension Plans, Center for State and Local
Government Excellence, April 2010. Funding levels as of June 30, 2009.
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Defined benefit plans have access to professional investment managers who are trained
in developing ongoing, long-term investment strategies that include an optimum mix of growth
potential and risk. Participants and taxpayers benefit from the favorable investment
performance of pooled pension fund assets, as well as fees and expenses that are significantly
lower than those of defined contribution savings plans. The wide range of investment options
open to large pension plans, such as foreign and domestic stocks and bonds and venture capital,
also improve investment returns. Furthermore, SERS investments are not affected by the
retirement timing of a particular employee, so the investment horizon never has to be
shortened.
Current funding of pension plans actually reduces long-term costs over time through the
compounding of contributions and interest earnings. To a large extent, investment returns
dictate the level of contributions needed to keep pension plans funded at healthy levels because
those returns provide about two-thirds of plan revenues which provide retirement benefits.
Actuarial projections assume that over the long-term, SERS will earn eight percent each year on
its investments. In some years returns will be below that rate and in others returns will exceed
it. Over the past 20 years, SERS has successfully outperformed its eight percent target, with an
average annual return of 8.6 percent from 1990 through 2009 (FY 2009 Actuarial Valuation, p.
5).
When returns are strong and above the actuarial assumed rate, as they have been in 13
of the past 20 years, the employer’s level of contributions will generally be lower than when
investment returns lag the actuarially assumed rate. When returns are less than projected,
those actuarial losses are amortized through increased employer contributions, which is one
reason why contributions needed from the employer will increase over the levels needed
earlier in the decade.
State and local government employer pension costs for all public
pension plans in Pennsylvania amounted to less than two percent of all state and local
government spending in 2008 (Issue Brief: State and Local Government Spending on Public
Employee Retirement Systems, National Association of State Retirement Administrators,
January 2011).
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Plan investments not only help keep costs down for plan sponsors, but are also a critical
part of the economic fabric of the state. According to the National Institute on Retirement
Security, each dollar in taxpayer contributions to Pennsylvania’s state and local pension plans
supports $9.46 in long-term economic activity in the state. Retiree expenditures stemming from
state and local pension plan benefits support nearly 70,000 jobs in Pennsylvania. These figures
reflect the fact that taxpayer contributions are, in the long run, a highly efficient source of
financing for retirement benefits that ultimately provide income and jobs for others
(Pensionomics: Measuring the Economic Impact of State and Local Pension Plans, National
Institute on Retirement Security, February 2009).
AFSCME believes in a society of opportunity where all workers not only earn a living
wage, but can afford to see a doctor when they are sick. AFSCME believes we all should have
the opportunity to reach our full potential in our chosen careers and to retire with dignity
when our work is done. For decades, SERS has provided workers and their beneficiaries with
secure retirement benefits. There is no reason to believe it will not continue to be able to do
so.
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