Public catching on to pension system woes

The truth is finally setting in about the health of Ohio’s public pension systems, but one shouldn’t be too optimistic that major reforms are on the horizon.

In 2007 the Fordham Institute commissioned the well-respected economists Robert Costrell and Michael Podgursky to analyze Ohio’s State Teachers Retirement System. Key findings from their report, Golden Peaks and Perilous Cliffs: Rethinking Ohio’s Teacher Pension System, included that:

  • The system is too pricey to sustain in its current manifestation;
  • The system encourages early retirement and “double-dipping”;
  • The system is out of step with the state’s current teacher needs, labor markets, and career patterns; and
  • The system lacks transparency.

Representatives of both the STRS and the teachers unions publicly questioned not only the veracity of the report’s findings but also the integrity of the authors themselves. Much of the media bought STRS’s line, including the Dayton Daily News, which said in an editorial about our report:

The Fordham Institute is wrong to imply that the retirement system is in crisis, or that Ohio taxpayers suddenly could be saddled with huge liabilities. Such alarmist talk is factually inaccurate and does not fairly characterize what the researchers found.

The retirement system has ample assets to pay retirement benefits. There is no risk that Ohio taxpayers could be stuck with huge, unforeseen pension liabilities.

Fast forward a few years.

By law, state pensions must be able to cover their liabilities within a 30 year period. But in its 2009 annual report, STRS reported that its unfunded liabilities were at “infinity,” meaning they can never be paid off unless changes are made to the system.

Last week, a joint analysis and examination of Ohio’s five public pension systems by the state’s major newspapers agreed. Ohio Senate President Bill Harris weighed in, saying that Ohio’s current public-employee pension systems are “not sustainable” and will require legislative action.

In 2007, Costrell and Podgursky used the power of economics and rational analysis to point out the serious problems confronting STRS. They have subsequently done deeper analysis in other states and have been at the forefront of badly needed pension reform efforts nationally.

Ohio’s political debate and its newspapers have caught up to the pessimistic scientists. The state’s public retirement systems really are troubled and in need of serious reforms.

Now that we agree on the problem, what should we do about it?

For STRS at least, our report called for transitioning away from the defined-benefit plan to a “cash-balance” one, where the guaranteed rate of return is closer to the rate of risk-free Treasury bonds than the current eight-percent return rate that STRS hopes to see.

It’s not likely, nor would it be fair, that the state will make radical changes to the pension expectations of current teachers and retirees. But those pension promises rely heavily on the contributions of younger teachers. Thus, switching plans for incoming teachers would require a hefty influx of cash to the system to maintain the benefits already promised to current teachers and retirees.

Given the state’s current financial plight, it’s tough to imagine the state coming up with anything close to what it would take to right the STRS ship. Instead, the fundamental flaws that exist in the system are likely to persist, and employers and employees will have to pony up to keep the system afloat. Currently, teachers put 10 percent of their salaries into the pension fund, and local school districts contribute another 14 percent. STRS is seeking 2.5 percent more from each, along with changes to the average final salary calculations, minimum retirement age, and other aspects of the system.

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