A Looming Crisis? DUQUESNE UNIVERSITY

 Prior to 1950s few people had pensions  Most worked until they died  Initial issue: company specific or industry- wide?  Labor wanted industry-wide (but lost)  G.M. first offered company pensions in 1950 ▪ Set the trend DUQUESNE UNIVERSITY

 Defined Benefit  Formerly the most common  Defined Contribution  Now the most common DUQUESNE UNIVERSITY

 State Employee Retiree System (SERS)  Most Commonwealth Employees  Funded by the Commonwealth, Employee Contributions, and Investment Income  Public School Employees’ Retirement System (PSERS)  All Public School Teachers  Funded by the Commonwealth, School Districts, Employee Contributions,and Investment Income DUQUESNE UNIVERSITY

 Guarantee a fixed monthly income upon retirement, usually for life  Minimum number of years to be vested  Amount determined by formula ▪ Years of service ▪ Average salary at retirement ▪ A “multiplier” DUQUESNE UNIVERSITY

 Employer has life-long obligation  The Social Security system provides a form of a defined benefit retirement plan DUQUESNE UNIVERSITY

 Annual Pension Equals  (Years of Service) X  (Average Salary) X  (Multiplier) DUQUESNE UNIVERSITY

 Years of Service  Often allow credit for other employment or military service  Allow participants to buy service years DUQUESNE UNIVERSITY

 Average Salary  PSERS and SERS use average of highest 3 years  Extra pay included in the average ▪ Overtime ▪ Holiday Pay ▪ Extracurricular Activities ▪ Developing Curriculum ▪ Attending Workshops DUQUESNE UNIVERSITY

 Multiplier  Most PA employees have a multiplier of 2.5%  Suppose 35 years of service and an ending salary of $80,000 (PS 10)  Pension = $70,000 per year ▪ Over 20 years the cost is $1,400,000 DUQUESNE UNIVERSITY

Average Salary Service Years MultiplierAnnual Pension Lifetime Costs $65, $56,875$1,137,500 $70, $61,250$1,225,000 $75, $65,625$1,312,500 $80, $70,000$1,400,000

DUQUESNE UNIVERSITY Average Salary Service Years MultiplierAnnual Pension Lifetime Costs $80, $40,000$800,000 $80, $50,000$1,000,000 $80, $60,000$1,200,000 $80, $70,000$1,400,000

DUQUESNE UNIVERSITY Average Salary Service Years MultiplierAnnual Pension Lifetime Costs $80, $28,000$560,000 $80, $42,000$840,000 $80, $56,000$1,120,000 $80, $70,000$1,400,000

DUQUESNE UNIVERSITY Average Salary Service Years MultiplierAnnual Pension Lifetime Costs $50, $17,500$350,000 $50, $26,250$525,000 $50, $35,000$700,000 $50, $43,750$875,000

 There are about 110,000 active SERS members  If the average salary at retirement is $50,000, then Increasing the multiplier from 2.0% to 2.5% results in an increase of:  110,000 X $175,000 = $19.25 billion DUQUESNE UNIVERSITY

Pittsburgh’s Going to the Super Bowl!!!

 DB plans are workable as long as there are increasingly more workers than retirees  When Bethlehem Steel went bankrupt in 2001 it had 7.5 dependents for each worker  In 1962 GM had 1 retiree to 11.6 workers: today it has 3.2 retirees per worker  There are about an equal number of SERS workers an d retirees (110,000)  There are 264,000 active PSERS members and 168,000 retirees DUQUESNE UNIVERSITY

 The Demographics are working against DB plans  Market realities have caused most private sector firms to abandon them.  Very similar to the problems facing Social Security DUQUESNE UNIVERSITY

YearDefined benefit plans Defined contribution plans %41% DUQUESNE UNIVERSITY

 Employee Contributions  SERS 6.25%.  PSERS 7.5%  Returns on investments  Expected 8.5%  1950 – 05: S&P up 7.94% : S&P up 6.75%  Commonwealth contributions vary  When returns are low contributions must increase  In June 2008 the Governor estimated state contributions would need to more than double by 2012 DUQUESNE UNIVERSITY

▪ Employer and Employee each make a contribution to an investment fund ▪ The usual is a 401(k) plan ▪ National average employer contribution is about 3.0% of salary ▪ Most employees “manage” their account ▪ The employer obligation ends at retirement ▪ George W. Bush’s idea for SS DUQUESNE UNIVERSITY

▪ The cost of a defined benefit plan can be less than, the same as, or more than a defined contribution plan - depending on the rate of return ▪ One advantage of the defined contribution plan is that the cost can be predicted DUQUESNE UNIVERSITY

▪ Gradually shift to a defined contribution plan ▪ Gradually impose the state and local income tax on SERS & PSERS income ▪ Increase the age for full DB pensions – similar to Social Security DUQUESNE UNIVERSITY