Economists respond to the STRS's attack on pension-system report
August 14, 2007
In June, the Thomas B. Fordham Institute released a study of Ohio's teacher pension system entitled Golden Peaks and Perilous Cliffs: Rethinking Ohio's Teacher Pension System. This report has triggered much overdue public debate in Ohio and beyond regarding teacher pension systems and their interaction with school-improvement efforts. The report, however, was not well-received by the State Teachers Retirement System of Ohio (STRS), which attacked the authors of the report.
The study, authored by Dr. Robert M. Costrell, of the University of Arkansas, and Dr. Michael J. Podgursky, of the University of Missouri, identified four major shortcomings in Ohio's existing "defined-benefit" teacher pension system:
- It encourages early retirement. Over time, the pattern of pension wealth accrual built into Ohio's teacher pension system has created powerful incentives for teachers to retire in their fifties. The average retirement age for Ohio teachers is fifty eight, which is well below the current minimum age for regular retirement in the Social Security system (age sixty five, but soon rising to age sixty seven), and below the private sector generally. With rising life expectancies, the cost of Ohio's defined benefit system will continue to rise as increasing numbers of teachers retire relatively young. Early retirement also creates a heightened demand for health insurance, because Medicare coverage does not begin until age sixty five, putting increasing strain on Ohio's already severely under-funded teacher retiree health insurance fund.
- It's a disincentive for young teachers and hinders teacher mobility. Young teachers who move from Ohio's pension system to another teaching or non-teaching job suffer serious losses in pension wealth. Teachers with ten or more years of seniority suffer very large losses if they move into another line of work or to another state. Additionally, Ohio's high payroll-contribution rate (currently ten percent and likely to rise) may hinder recruitment of new teachers.
- It lacks transparency. Ohio's teacher pension system is remarkably complex and opaque. Relatively few people understand its intricacies, which have allowed the system to evolve into a costly and completely irrational structure-a set of "golden peaks" and "perilous cliffs" in pension wealth accumulation that defy any logic-with limited public awareness of how the system works and what the implications of its workings are over the long term.
- It is rife with ad hoc fixes. Because the system now encourages early retirement, Ohio has responded by adding ad hoc incentives for continued employment, making the system even more complex and costly. Today, it permits teachers to collect their pensions while continuing to work full time as a teacher (known as "double dipping")-at a time when the assets of the pension system fall far short of accumulated pension and health insurance liabilities.
The STRS responded to this first-rate study in an inflammatory fashion, charging mistakes and misstatements and disseminating these charges far and wide, and in fact shared its critique with every teacher in the system.
In response to this attack, Costrell and Podgursky have now provided a detailed, documented professional response. (Read Costrell and Podgursky's full reply.)
A summary of Costrell and Podgursky's response:
- The STRS ignores the central theme of the report. The way individual pension wealth is built up makes no sense, especially from the perspective of a young teacher.
"We think it is significant that a Columbus teacher entering the Ohio system at age twenty five, would, at age fifty, suddenly earn $123,000 in pension wealth accrual, after much smaller annual accruals for the previous twenty-four years," they said. "At age fifty, it is as if her 401(k) retirement account contributions totaled $123,000 in that one year."
If she stays another five years, she accrues the equivalent of another $448,000 in contributions to her retirement account. Then, over the last half of her fifties, she gets very little increase in her pension wealth. If she sticks it out to age sixty (thirty-five years), she gets a one-year jump of $113,000. But if she stays any longer, the pension system punishes her, reducing her pension wealth each and every year.
- The only misstatement seems to be that of the State Teachers Retirement System of Ohio. The retirement system's rather emphatic statement that, "STRS Ohio is not seeking any contribution increase for the funding of its pension plan" is explicitly contradicted by two features of its proposal to boost teacher and employer contributions to the system. First, 0.6 percentage points of the STRS's proposed five-point increase in contributions are designated for pensions. (See page twelve of the Ohio Retirement Study Council's Annual Report 2006.) Moreover, as the STRS states in its March 2007 report to the Ohio Retirement Study Council, once the contribution hike is in place, "the current one percent of employer contributions going toward health care can start flowing back into the pension fund" (see page five of the report here). Taken together, the proposed five-point contribution increase will result in a 1.6 point increase for pension funding-about one third of the total hike.
Clearly the hike is designed to shore up both pension and retiree health care funding (as the report states), contrary to the STRS's claim that it "is not seeking any contribution increase for the funding of its pension plan."
- The STRS was consulted. The STRS statement that it was not consulted for the report is simply false. E-mails were exchanged and a conference call was conducted with an STRS board member; however, the STRS never responded to a list of questions submitted asking for additional information.
As it turned out, the report focused on the incentives embedded in the defined benefits formula, and this analysis could be conducted with publicly available information. That analysis stands-as does the rest of the report-despite the STRS's failure to provide answers to the researchers' questions.
In short, the report stands. The STRS's attack against the authors and the Thomas B. Fordham Institute has no foundation and serves only to divert the Ohio public from the important issues identified and the first-rate analyses of these issues provided in the report. We strongly encourage all Gadfly readers to read the original report, the STRS critique, and Costrell and Podgursky's reply very closely. There is much here to consider and think through, especially in light of ever more calls for increased educational spending to do more of the same. Ohio-as a state that is getting grayer and poorer-badly needs to spend its tax dollars smarter, and Costrell and Podgursky provide powerful guidance on how to do this while also making the teaching profession more appealing to young college graduates.
Read the original report, Golden Peaks and Perilous Cliffs.
View the STRS's critique of the report.
Read the authors' full reply to the STRS's critique.