Pennsylvania's School Employees' Retirement System has survived the Great Depression, two world wars and multiple economic downturns.

But if state lawmakers and school district officials have their way, it won't survive the "pension tsunami" — at least not in its current form.

Legislators and state associations representing school boards and school business managers are calling for major changes to cut costs and avoid future massive rate hikes.

In general, three approaches are under consideration:

• Keeping the current plan, but with major benefit cuts for new PSERS members.

• Enrolling all new school employees in a defined-contribution plan, similar to a 401(k), instead of the current defined-benefit plan.

New members would no longer be guaranteed a specific pension but would pay into an individual retirement fund matched by contributions from school districts and the state.

Instead of employers bearing the risk of poor pension fund investment returns, the risk would be borne by employees.

• Switching to a hybrid plan that includes elements of defined-benefit and defined-contribution plans.

In addition, Gov. Ed Rendell, lawmakers, school associations and even the state teachers' union are seeking changes in the methods used to determine how much employers pay into the pension fund each year.

The proposals would increase the minimum school districts and the state must pay and limit annual rate increases.

That wouldn't eliminate the need for higher contributions, but it would make the rate hikes more manageable.

Legislative hearings are being held on possible solutions to the pension crisis, but lawmakers aren't expected to vote on potential fixes until next budget year.

How much is too much?

As the debate intensifies, it will likely focus on one key question: Is the current pension plan too generous?

State Rep. Scott Boyd of Lampeter thinks so.

"Pennsylvania has one of the most generous pension programs, if not the most generous program, in the entire 50 states," he said.

"It's really creating almost a class clash because people in the private sector … who see their income going down are being expected to continue to reach deeper in their pockets to pay public-sector pensions," he said.

"We have to convince people that it's simply not sustainable."

Boyd, who has sponsored legislation to switch state employees to a defined-contribution plan, admits reaching a consensus won't be easy.

The pension issue "is destined to pit brother against brother and neighbor against neighbor," he said.

The Pennsylvania State Education Association, which represents a majority of PSERS members, opposes changes to the current system.

"I think going after people who have a sound pension is not the answer," said Jerry Oleksiak, PSEA treasurer. "Teachers and public school employees are a solid part of the middle class. … Our members are taxpayers, too."

Oleksiak said the proposed benefits changes would save little money and do nothing to reduce the billions of dollars in unfunded liabilities the system has accrued in the last decade.

By law, the changes would affect only new members, not PSERS' nearly 460,000 current members and retirees — teachers, administrators, custodians, secretaries and other school employees.

Oleksiak argues that the workers have paid their full share of pension contributions year after year, while school districts and the state took a "funding holiday," paying less than their share for nearly a decade.

Those underpayments, coupled with investment losses and increased benefits obligations added to the system, created the $29.6 billion funding imbalance.

"Teachers are often painted as the bad guys, but we have honored our commitment. We honored it when (the pension system) was 123 percent funded, and we're honoring it now," Oleksiak said.

"What's important to us as people in the system is that the state keep its promise."

Benefits are strong

But is that promise too costly, especially in the current economic climate?

Defined-benefit pensions used to be commonplace in the private sector. But only about 16 percent of employees now have them, compared with 40 percent in the 1980s.

In contrast, about 90 percent of public-sector employees have a defined-benefit plan.

And according to a 2004 study by the State Government Commission, the PSERS plan is one of the most generous.

The study analyzed PSERS and 78 other public-sector pension systems and found that only two allowed their members to withdraw all their contributions, plus interest, when they retire, as PSERS does.

Only four of the 79 systems had a higher "multiplier" — the number used to determine a member's annual pension amount — than PSERS' multiplier.

And only one system had an early retirement rule as generous as PSERS', which allows members to retire with only five years of service.

The study also found that, for the average PSERS retiree, no additional savings would be needed to maintain a pre-retirement standard of living.

Steve Nickol, a former state lawmaker from Hanover who now works for the PSEA, said those comparisons are deceptive.

Nickol, who also served 18 years on the PSERS board, said many public-sector pension plans in the study provide health care coverage for members, while PSERS provides only a $100 monthly health benefit.

Most other plans also include an automatic cost-of-living increase, he said, while PSERS retirees get an increase only if the Legislature approves it. The last one was approved in 2002.

PSERS members also pay a higher share of their salaries — about 7.3 percent — into their fund, compared with an average of less than 5 percent for other plans, he said.

Cuts are proposed

Not surprisingly, the Pennsylvania School Boards Association and the Pennsylvania Association of School Business Officials favor reducing many of the benefits cited in that 2004 study.

PASBO advocates:

• Reducing the multiplier from 2.5 to 2, the number in effect prior to the passage of Act 9 in 2001. That would reduce benefits for new members by 25 percent.

Retirees' pensions are determined by multiplying 2.5 percent by an employee's years of service and average salary. A teacher with 30 years' experience earning $60,000 per year, for example, would qualify for an annual pension of $45,000.

• Eliminating members' ability to withdraw all their contributions when they retire.

• Increasing the minimum retirement age and the vesting period from five to 10 years.

• Basing retiree pensions on a five-year, rather than a three-year, average of an employee's highest salaries.

PASBO also advocates an employer contribution rate for 2011-12 of 11 percent and gradual increases of about 3 percent per year until the system is fully funded. The maximum employer rate would be 20 percent.

The PSBA plan has spawned legislative proposals in both the state House and Senate.

It advocates:

• Converting the system to a hybrid defined-benefit/defined-contribution plan for new members.

• Under the new defined-benefit portion, employee contributions would drop from the current average of 7.3 percent to 3.25 percent and the multiplier would drop from 2.5 to 1.

• Under the new defined-contribution system, members would contribute a minimum of 3 percent into an individual annuity savings account, with a mandatory 2 percent employer match.

Minimal cost savings

So, how much would these changes save taxpayers?

That's hard to quantify.

PASBO officials were not available to provide data on potential savings from the association's plan.

Boyd said a switch to a defined-contribution plan for all state employees would yield little or no savings initially, but could save taxpayers "hundreds of millions of dollars in 50 years."

He could not put a specific number on the projected savings.

The PSBA proposal would save about $250,000 to $750,000 per year beginning in 2018, said Timothy Allwein, the organization's assistant executive director. Those savings would increase to about $1 million per year in 2022.

But that's just a drop in the bucket for a system that will require a projected $4 billion in contributions from the state and school districts in 2012-13.

The PSBA proposal also would require the state to pay the lion's share of any future rate increases, mandating that school districts' pension contribution rates not exceed their Act 1 indexes — about 3.4 percent, on average, for 2010-11 — in a given year.

The state would pick up the rest of the cost.

Many lawmakers oppose that provision, saying it's not a solution, but a tax shift.

"Dollars taxed are dollars taxed," state Rep. Gordon Denlinger of Narvon said in an e-mail.

"The government in Harrisburg does not print money, and we do not borrow for operations, so I fail to see how such a switch really benefits the citizens of the commonwealth."

Lawmakers and school advocacy groups agree the state needs to seek new sources of revenue to fund pensions.

Among the possibilities are leasing fees for the drilling of Marcellus Shale gas and income from the sale of the state liquor store system.

Rendell also has proposed expanding the state sales tax to generate additional revenue.

How soon those proposals could come to fruition — if they materialize at all — is not clear.

Before the state pumps any new money into the pension system, Boyd argues, it must reduce the high cost of benefits.

"If you want to fix a problem, the first thing you've got to do is stop the bleeding to make the system well," he said.

No 'silver bullet'

Nickol, of the PSEA, said the proposed changes aren't the solution people think they are.

He cites the experience of Alaska, which switched from a defined-benefit to a defined-contribution pension plan for new members in 2005 in a bid to cut billions of dollars in unfunded liabilities.

The two-tiered system experienced a funding shortfall, Nickol said, because new members weren't paying into the DB system.

"If you close off the pension fund, people in the system are aging out and no one is coming in to pay out benefits, so you have all these unfunded liabilities with no funding stream to pay them off over 30 years," he said.

"They passed this silver bullet defined-contribution plan, but it didn't resolve the problem. It actually dug a deeper hole for them."

As a result, employer contributions soared to nearly 50 percent, Nickol said, and Alaska is now considering a return to a DB plan.

That's what happened in West Virginia, which switched from a defined-benefit to a defined-contribution plan for its teachers in 1991 but switched back in 2008, Nickol said, because of funding problems with the new plan.

If Pennsylvania were to adopt a two-tiered pension system, it would make education jobs less desirable to new hires, Oleksiak said.

Under a defined-contribution plan, school employees would have to contribute at least 20 percent of their salaries and earn strong investment returns every year to match their current retirement benefits, according to the PSEA.

"It is something that does help attract and retain teachers and all the other people in the system," Oleksiak said of the current benefits package.

Is it too much, though?

"I think everybody deserves a sound pension," he replied.

Boyd said the argument that teachers and other public employees should get robust pensions because they earn less than their private-sector peers is no longer valid.

"I don't think teachers, by today's standards, are being paid relatively low salaries," he said. "They're starting at close to $40,000, and most are earning $60,000.

"I thought being a teacher was a call to wanting to teach kids. … If it's about the money, if that's the perspective they have, they maybe ought to consider working in the private sector, where they'd be paid more."

Oleksiak said the PSERS system, which was established in 1917, has stood the test of time and should not be changed for political gain.

"To do something that's going to destroy a system that's worked so well for so long for some immediate political advantage is certainly not going to help the people in the system — or education in general," he said.

But Denlinger warned that the public won't stand for the status quo.

"It is my hope that unionized state workers would come to understand that the frustration of the taxpaying public is building to such a degree that a failure to make concessions will not go well in the end," he said in an e-mail.

"Public support for public-sector defined-benefit plans is virtually gone. It's time state government did what business did 20 or more years ago."

bwallace@lnpnews.com