Fixing the Public Employees’ pension crisis

Public employee pensions are time bombs set to explode.  The State of Illinois finances are in such a state of crisis that its comptroller, Susana Mendoza, has told the legislature that over 90% of its monthly revenue is now being commandeered for court-ordered payments, primarily to pay current pensioners.  If Illinois does not pass a new budget within a few days there will be a financial crisis.

According to Forbes:

Public employee pension plans around the country are facing a shortfall of at least $1 trillion, and some of the largest plans are beginning to radically cut promised benefits because they have not stashed away enough to meet their obligations.

There is only so much money to go around.  Promises that can’t be kept won’t be kept … and that includes pensions.

One sign of things to come is a bill signed by Pennsylvania Governor Tom Wolf.  It reforms the state pension system that makes it more sustainable.

 “Let’s be clear: This plan addresses our liability in the only real and responsible way possible, by changing the structure of pension benefits,” said Mr. Wolf. “The fact is, we cannot accelerate the shrinking of our liability on the backs of our current employees, and this bill recognizes this in a real, concrete way.”

The bill moves new workers not in high-risk jobs such as state police and corrections officers into a hybrid retirement system.   Half of their retirement benefits will come from pensions paid for by the taxpayer and the other half will come from a 401(a) defined contribution plan.  A 401(a) is similar to a 401(k) but for public employees.  There are differences, but both transfer responsibility for retirement income to the employee and away from the employer.

The law is projected to save more than $5 billion and shield taxpayers from $20 billion or more in additional liabilities if state investments fail to meet projections, said a news release issued from the office of Republican Sen. Jake Corman, the bill’s chief sponsor.

We suspect that Pennsylvania is just the first state to adopt a system that transfers the responsibility for public employees’ retirement income away from the taxpayer and toward the employee.  It levels the playing field between public and private employees.

It will also make financial planning increasingly important for everyone.

Click HERE for questions about financial planning.

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