PSERS stands for "Public Schools Employee Retirement System," which is a pension plan for Department of Education employees in Pennsylvania. As of the close of the first quarter of 2011, the pension trustees managed over $50 billion in assets on behalf of over 600,000 beneficiaries. It is a defined benefit plan -- a traditional employee pension plan.
Defined Benefit Versus Defined Contribution
With a defined benefit plan, the employer takes on all of the market risk. The employer guarantees plan beneficiaries a specific level of benefits, regardless of what happens to the investments in the fund. The employee has no risk in a defined benefit plan, but returns may be comparatively modest in boom times. With a defined contribution plan, on the other hand, the worker selects investment options and receives a retirement income based on the results of his investments. There are no built-in guarantees in a defined benefit plan, though some workers purchase conservative investments that guarantee a specific return. Plans 403b and 401k are well-known examples of defined benefit plans.
Taxation of Contributions
Workers covered under PSERS do not take a tax deduction for contributions to their pension. This is because pension contributions never make it into their bank accounts to be taxed in the first place. Instead, school districts route all contributions directly to the pension funds. Contributions are not tax-deductible, but tax-free.
Taxation of Growth
Under federal law, the IRS does not charge income tax or capital gains taxes on any assets within either a defined benefit pension plan or a qualified defined contribution pension plan, under the Employee Retirement Income Security Act of 1974, or ERISA.
Taxation of Income
Generally, the IRS will tax any pension benefits received as ordinary income. Under current law, this income is generally taxed at a higher rate than long-term capital gains taxes, though assets that are eligible for capital gains treatment do not typically get the same tax deferral as pension assets.