The need to reform Ohio's State Teachers Retirement System won't go away

Ohio's State Teachers Retirement System (STRS) has serious problems that won't go away without fundamental changes to the system. The system, designed for an era when people worked in the same job for life, lived in the same community until retirement, and died in their 60s on average, is in need of serious modernization. Many teachers retiring in 2008 can expect to retire in their mid-fifties and collect pensions for as many years as they spent in the classroom, while the average American is looking at collecting Social Security at 65 and soon at 67. Not surprisingly, these demographic realities make STRS an increasing financial drain on school districts and on younger teachers - hence, a recent call in the Ohio House to increase spending by both (see here).

The system also is a disincentive to new teachers entering the system. In June 2007, a Fordham-sponsored analysis of the pension fund pointed out the challenges facing STRS and offered some ideas for reform. Additionally, this report (written by the economists Robert Costrell and Michael Podgursky) became the basis - expanding their Ohio work to a national perspective on the problem - of an Education Next article, a Barron's editorial, and an Education Week article.

As reported today by National Public Radio, STRS needs to be updated if Ohio wants to have a sustainable retirement system for public school teachers and attract and keep the best and brightest teachers in the Buckeye State's public schools.  

The following report aired today on 90.3 WCPN, National Public Radio in Cleveland. Listen to the report here.

When you think about the quality of education kids are getting, the first thing that comes to mind is probably not teacher pensions. But some economists think Ohio's teacher pensions can affect the quality of teachers in the classroom. ideastream education reporter Dan Bobkoff explains:

Ohio's teacher pension system, like most in the nation, is designed to reward teachers who are in it for the long haul. And that's as it should be, say supporters - why shouldn't those who dedicate an entire career to helping students get the most reward? But economist Robert Costrell says it's not that simple. He worries that the long-haul incentive may actually work against quality classroom instruction.

Costrell is an advocate for reforming what he considers outdated teacher pension systems. In fact, he's a professor in the University of Arkansas' Education Reform department.

His logic goes something like this: A teacher is thinking about retiring after 24 years. If she retired this year, her pension benefits would be worth a little more than $300,000 over her lifetime. But if she waits one more year, her pension is all of a sudden worth more than $400,000. And if she were to wait 6 years, Costrell says, it's even better.

Robert Costrell: Her pension wealth grows from about $315,000 to almost a million dollars.

And there's another even higher spike at the 35 year mark, after which the benefit begins to decline. And every additional year she teaches, she's still working, as opposed to, say, lying on the beach, and paying into the pension fund, not collecting the pension she's eligible for.

Robert Costrell: She's actually getting punished for staying in the system longer.

In reports published by Stanford's Hoover Institution and elsewhere, Costrell theorizes that some bad teachers are staying on too long in order to get their first spike in pension benefits, and then conversely, some good ones may be leaving while they're still energetic in their 50s, in order to get the best financial deal.

Robert Costrell: This is probably not the kind of system you would design if you were trying to maximize the overall quality of the teachers in the workforce.

That's a why he thinks it's time for a wholesale rethinking of Ohio's teacher pensions. He advocates a so-called cash balance system. What you contribute is yours. Every additional year you teach, the more money you have in your retirement account. If you change careers, you can take the money with you. He thinks that's more sustainable, efficient, and fair.

But Laura Ecklar, spokesperson for the State Teachers Retirement System of Ohio, disagrees. She says Costrell, and his co-researcher Michael Podgursky, are not thinking like teachers.

Laura Ecklar: They're looking at the retirement pension plan as economists, and there's certainly nothing wrong with that, but the way the defined benefit plan is designed is to reward the career educator.

Ecklar says the state retirement system is performing well, and has options to meet most teachers' needs. When an educator gets near retirement age, Ecklar says most think about it like a consumer.

Laura Ecklar: they're looking at is my retirement going to be enough to help me security? Is it going to cover my bills?

In other words, it's not that big a deal to educators like Rebecca Thomas of Shaker Heights to put off retirement benefits for another year. She's only 56, and while she's thinking about retirement, she's not obsessing over what age maximizes her pension.

Rebecca Thomas: It's more about like what will I be comfortable with personally? What will I do?

Thomas is also the president of the teachers' union in Shaker Heights and she says her teacher friends think about their pensions, but it's far from the only factor in deciding when to retire.

Rebecca Thomas: I think people, for the most part, stay on because they want to stay. I know teachers who've been here more than 40 years, and the retirement piece is not that interesting to them because they do love teaching.

Economist Robert Costrell admits he doesn't have much data yet on how many teachers are basing their retirement decisions on the pension structure, but he says there is evidence from research in Missouri to suggest that those peaks in pension wealth do tend to accelerate retirements.

Robert Costrell: People do respond to these incentives. They don't respond ONLY to these incentives-people have lots of reasons for doing what they do, people move, they want to do something else, a spouse retires, lots of things going on, not to mention a love of teaching despite the financial sacrifices involved.

Costrell plans to do more research. In the meantime, he's trying to convince state legislatures around the country that it's time to overhaul teacher pensions - both for the sake of their budgets, and the quality of education.

More By Author