Pennsylvania’s public employee pension plans are on a path to long-term fiscal sustainability thanks to a multiyear effort by policymakers to address the state’s sizable unfunded pension liability. Although the plans’ funded level remained relatively low in 2020 at 58%—below the national average of 70%—the state made three consecutive years of payments to the plans that were sufficient to cover benefits and reduce debt, which is real progress. In addition, a new benefit plan put in place to better manage financial risk, along with efforts to reduce investment fees by billions, limits the threat of developing new unfunded liabilities.
It will take decades for Pennsylvania’s pension plans to achieve full funding, but an understanding of how policymaker decisions created a more positive trajectory can inform efforts elsewhere to improve the fiscal sustainability of public employee pensions.
Pennsylvania serves as both a cautionary tale and a turnaround story. The Pennsylvania State Employees’ Retirement System (SERS) and the Pennsylvania School Employees' Retirement System (PSERS) were fully funded in 2000, thanks largely to strong investment gains in the 1990s stock market. But unfunded benefit increases and a longtime pattern of not fully funding annual required contributions meant that the state went from a $20 billion surplus in 2000 to a $60 billion deficit in 2015—one of the largest dips recorded nationwide.
By 2010, Pennsylvania faced a substantial pension challenge. Contributions toward SERS and PSERS in the preceding decade turned out to be less than half of the actuarially recommended amounts, placing Pennsylvania 49th among states in fiscal discipline for meeting pension funding requirements. From 2003, the last year in which Pennsylvania reported its pensions as fully funded, to 2010, the gap between funding and promised benefits rose to $27 billion. At that point, the outlook was bleak. Without changes, the cash flow pressure to pay for rapidly increasing benefit payments would have left the state retirement system headed towards insolvency.
Knowing that funding levels were insufficient to pay for promised benefits and that previous benefit enhancements were unsustainable, Pennsylvania lawmakers enacted Act 120 in 2010. This legislation set a slow but steady ramp-up toward making full employer pension payments to both PSERS and SERS, as recommended by the plans’ actuaries. Importantly, it also created a benefit tier for new hires that reversed the enhancements made in the early 2000s.
The contribution ramp-up increased annual payments from less than $1 billion in 2010 to more than $6 billion in 2017. However, unfunded liabilities continued to rise to $65 billion during this time. Then, starting in 2018, when the payment reached what is known as the annual required contribution—the amount recommended by the plans’ actuaries to fully fund the pension system over time—the state began to see progress in paying down its pension debt, achieving positive amortization.