HARRISBURG -- Gov. Wolf's proposal to help balance the Pennsylvania budget by offering some state workers an incentive to retire early is an approach that has been tried throughout the United States.
Such proposals do not always accomplish their goals. Retirement incentives and cash buyouts offered by Hawaii through a 2000 law that attempted to "tame an unduly cumbersome civil service system" did little to reduce the size and cost of government, according to a state auditor's report. A 1993 early retirement incentive in Minnesota likely cost more than it saved, the state's legislative auditor found.
In Pennsylvania, an early retirement incentive offered to public school employees in 1992 and 1993 saved approximately $216 million in salaries but increased the pension liability by $284 million, producing a net cost of $68 million, according to an analysis by the Public Employee Retirement Commission.
"Early retirement incentives rarely live up to their promises, in terms of how much they will save," said Luke Martel, who oversees research on retirement and pension policy at the National Conference of State Legislatures.
The Government Finance Officers Association, which represents public finance officials in the United States and Canada, has warned that early retirement incentives often have higher costs and lower savings than anticipated, and that governments should use "extreme caution" in considering them.
But aides to Wolf say his proposal to close a small part of the Pennsylvania budget shortfall with a temporary early retirement incentive for state workers not only would save about $25 million next year in the state general fund — it also would produce savings for the pension system serving state workers.
That is both because not all retiring workers are expected to be replaced and because — due to a 2010 change to the pension plan — the new workers would earn a less expensive benefit than was earned by the new retirees, Budget Secretary Randy Albright said in an interview.
"The savings ultimately to the system are going to be fairly significant," he said, later adding: "We wouldn't design a retirement option that would add to the unfunded liability."
When an early retirement incentive was considered in 2003 -- before the more recent change to pensions for new hires -- estimates suggested the proposal would add between $600 million and $800 million to the unfunded liability of the State Employees' Retirement System. That would increase employer contributions by between $97 million and $137 million a year if amortized over 10 years, according to an actuarial analysis at the time. Pennsylvania last offered an early retirement incentive for SERS members in 1998 and 1999, according to the retirement system.
In Pennsylvania, state employees normally have to work 35 years — or reach a certain age, which varies according to their hiring date and the kind of work they do — to retire and receive their full pension benefit. The governor is proposing allowing people who have worked 30 years to retire without having their pension reduced by an early retirement penalty. Years of service is one of the factors used to calculate the size of a worker's pension, so employees taking advantage of the incentive would receive a lower benefit than if they continued to work, Albright said.
Avoiding the early-retirement penalty would make a significant difference to employees who want to leave state service. An employee who had worked 30 years and whose final average salary was $60,000 might receive a maximum annual benefit of a little more than $33,000 with the early-retirement reduction, compared to $45,000 without the reduction, according to SERS.
The retirement system was not consulted about the early retirement proposal, and officials there do not have information about it beyond the publicly available budget materials, spokeswoman Pamela Hile said Friday.
The administration estimates that about 2,000 workers would qualify for the early retirement incentive, and that half of them would take it. Of the employees who retire, the administration estimates that 80 percent will be replaced, and that the new hires will be paid about 75 percent of what the retiring workers earned, Mr. Albright said. Officials also expect a lag time before the replacement hiring is complete. All told, the governor's office expects the incentive to save the state general fund about $25 million next year.
Right now, the incentive is envisioned for executive branch employees under the governor's jurisdiction, with no particular jobs excluded, but Albright said the administration wants to work out the details with legislators. Once that is done, he said, the administration would request a full actuarial analysis.
Response from the General Assembly has been fairly muted. During a Senate budget hearing last week, Appropriations Committee Chairman Pat Browne (R, Lehigh), sought confirmation that the administration would seek an actuarial analysis from the pension system. In a House hearing, Rep. Joe Markosek of Monroeville, the ranking Democrat on the House Appropriations Committee, said that any proposal should not increase pension debt.
Employee unions are generally supportive of the proposal. David Fillman, executive director of AFSCME Council 13, said he is an advocate of early retirement plans, though he noted that vacant positions could increase work for remaining employees.
Albright said that in a typical year, there may be 4,000 retirements across state government, and that he does not expect that an additional 1,000 departures would harm the delivery of services.
Fillman, who is also chairman of the board of SERS, said he expected the proposal would cost the pension fund.
"It's a good benefit, but there's a cost involved, obviously," he said. "We have to crunch the numbers."
Tom Herman, president of SEIU Local 668, said that as long as members could retire early without losing benefits, the union would support the concept.