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Defined benefit system should remain core of retirement plan

Posted on | December 9, 2009 | 11,918 views |

By Larry Lewellen

retirementmattersAs the state of Ohio retirement systems seek revisions to their benefit requirements in order to remain appropriately funded and stable for the long term, which they are required to do by law, it’s only natural for our faculty and staff to have questions about what’s changing and how it will affect them.

To keep our faculty and staff as informed as possible, this column will be the first in an ongoing series of communications about the issues and how Ohio State is participating. We also will continue sharing information directly with faculty and staff governance councils.

In the coming weeks, we understand there will be some public discourse in the media about the viability of the state’s five defined benefit plans, which include the Ohio Public Employees Retirement System (OPERS) and the State Teachers Retirement System of Ohio (STRS), and whether public employee benefits are appropriately designed.

A significant question being raised is if the pension systems should be completely replaced by a defined contribution system, such as a 401(k) or 403(b) plan, where much of the private sector has moved.

It is in Ohio State’s interest to have a strong benefits package to attract and retain the best employees, who are the talent backbone of the university’s success. In our view, the best policy for the public and as an employer includes maintaining the current defined benefit systems as retirement plan options, along with the defined contribution options that also are available. The defined benefit system is the system of accruing a monthly pension benefit versus simply accumulating a cash account (defined contribution).

The move to completely replace the defined benefit systems by defined contribution plans is perpetuated by the notion that taxpayer dollars will be saved. But the reality is that two-thirds of the pension benefits paid out come from investment returns while the remainder comes from employee contributions.

Retirees in a defined-benefit plan can count on a steady stream of income the remainder of their lives. Generally, people relying on the moderately funded 401(k)-type plans adopted by many private employers will outlive their assets.

We of course have defined contribution options here at Ohio State — the Alternative Retirement Plan (ARP) and the supplemental 403(b) and 415 plans. The ARP is particularly attractive for those who spend their careers at multiple institutions, as it is totally portable, and our supplemental 403(b) and 415 plans are outstanding options for deferring additional income into retirement assets. Our argument here is that the defined benefit plan — aka, the “pension” model — should remain available as the core benefit of our retirement systems.

Here are some other points expressed by proponents of the current systems that we believe make a strong case for maintaining defined benefits:

• Private companies have moved their pensions to defined contributions only to cut costs, not because it is the right employer or social policy. Defined benefit systems have shown they can deliver the same retirement income as defined contribution plans with 46 percent lower costs, according to a 2008 National Institute on Retirement Security (NIRS) report.

• Ohio public employees are not participants in Social Security, and thus are not eligible to receive any benefits from this system (other than from a period of private sector employment). Where 401(k)-type programs are typically used to supplement Social Security in the private sector, the pension benefit provided to public employees is often the only retirement benefit they receive.

• Defined benefit plans go against the grain of the spend-it-all-now mentality that has pervaded American culture. They provide tax advantages for members and ensure a secure retirement, elements of strong fiscal stewardship that should be emulated, not ridiculed. Because of this sound management, cost increases for participating employees and employers have been minimal over the past 25 years.

• In their current form, Ohio’s pension plans are a critical component of the state economy. In 2006, nearly 360,000 retirees, almost 90 percent of who lived in the state, drew $8.29 billion in benefits from Ohio’s plans. According to the NIRS report, for every dollar in benefits sent to retirees, $1.33 was returned to the state economy.

There seems to be a misconception that retired public employees are getting rich through their pensions while private-sector workers languish. The average Ohio public pension paid is a modest $23,535 a year.

The idea of employers helping take care of their workers after years of service should not be anathema to anyone. It’s simply the right thing to do, and Ohio State will continue to influence the discussions in any way possible.

Our government affairs staff and the Inter-University Council (made up of all the public universities in Ohio) are active in dialog with the legislature, which has to approve any major alteration to the pension systems. And personally, I co-chair a statewide coalition on behalf of Ohio State and the IUC that strives to bring reasoned ideas and solutions to the retirement benefit discussion.

Be assured that our confidence in the the leadership of our retirement systems remains strong and unshaken.

The media scrutiny over the pension systems is directly related to the changes those systems are asking the legislature to approve in order to remain viable. This is nothing out of the ordinary as adjustments must always be made to account for the number of people retiring, longer life spans and rising health care costs. Adjustments would have been necessary had the recent recession happened or not.

During winter quarter we will address what the changes will be and what they mean to our faculty and staff once the legislature has finalized its direction. I have been invited to appear at the Feb. 4 Faculty Council meeting and will continue to have dialogue with our University Staff Advisory Committee and Faculty Compensation and Benefits Committee.

We will continue to develop our communications and other means to keep you informed. Thank you.

Category: Retirement Matters
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12 Responses to “Defined benefit system should remain core of retirement plan”

  1. Robert Betts
    December 10th, 2009 @ 9:02 am

    I am a new hire one week ago at OSU. I have a question on the retirement plans. I am a 25 year Navy veteran. I am receiving my pension now from the military which does not pay into social security either, how will this pension and the pension from OSU going to conflict each other when I retire? Is there a plan that I should take so there is no conflict in the two? Thanks for your help.

  2. Eric Seiber
    December 10th, 2009 @ 9:27 am

    I have some concern that the interests of individuals in the defined contribution plans are being overlooked. If the state’s contribution does go up to cover a shortfall, will all of that contribution be directed towards the defined benefit plans or will defined contribution participants be allowed to keep the portion based on their salaries?

  3. tina love
    December 10th, 2009 @ 10:01 am

    As a recent retiree of the OPERS program, what can we do to assist with the fight against changing the defined pension programs? I think it would be helpful to know how we can assist.

  4. steve hills
    December 10th, 2009 @ 10:04 am

    Larry, What a good thing you are doing in keeping us all informed! I am glad you are taking this most reasonable stand. You may or may not remember that I taught a benefits course in the Fisher College for a number of years. I strongly support your position. If I can be of help to you, let me know. Steve

    Steve Hills, Emeritus Faculty & Academic Director, Inter’l Programs, Fisher College of Business.

  5. Shelly Minck
    December 10th, 2009 @ 10:09 am

    To Larry Lewellen: The primary reason I came to OSU 25 years ago after paying into Social Security for 16 years, was the opportunity to participate in a state retirment program and for OSU’s wonderful health insurance coverage. Fortunately, after a financially devasting divorce situation, I buckled down and studied about finances/investing/retirement programs/tax savings opportunities, etc. on my own. That’s when I came across OSU’s opportunity to invest in a 403b program in addition to my state retirement and I have contributed to a 403b program since then. But I had to do this on my own - not because of educational programs offered by OSU about the opportunities for supplemental contribution vehicles. Granted, I’ve lived modestly and do not spend outside my means, but today I have no debt and could retire tomorrow if I needed wanted to. I wholeheartedly support OSU’s position to maintain these state retirement systems! What I would encourage the university to do though is to more fully explain the opportunities to invest in these other vehicles to current employees as a means to supplement a defined benefit program. I’ve found it very difficult to explain the opportunity of a 403b to others on campus in a convincing way and I can’t remember the last time (if ever) that the information was offered through a mini educational program on our (Mansfield) campus. I know new hires are now provided information, but I’d love to see annual lunch & learn program offered about this. As you move forward on the statewide level in support of maintaining a defined benefit program, please let me know if I can help in any way. And, please keep up the good work, Larry. You’ve done a wonderful job of keeping staff informed on issues over the years. I, for one, appreciate it.

  6. Doug Leavitt
    December 10th, 2009 @ 10:21 am

    I am a ten year employee at the Medical Center. When I was hired I opted for the ARP plan. At that point in my life I was unsure how long I would stay at OSUMC. Since then, I’ve decided to make OSUMC my long term employer. Since I opted to go with ARP in the first weeks of my employment, I currently no longer have a choice between defined benefit vs. defined contribution plans. I would like to see the State open this up so that if we choose, we could purchase years of service and move back into the defined benefit plan. Currently the only way to do this is to leave OSU. It seems wrong that we offer this to people who leave and come back but not to loyal employees who stay.

  7. Steven Reiss
    December 10th, 2009 @ 10:42 am

    When I started teaching, the Dow Jones Industrial Average was under 900. Now it is over 10,000. Obviously, the problem isn’t that the market went down — it went way up — but that the plan promises too much.

    The pension plan promises 8% a year return on contributions at a time when we have deflation and long term bonds are paying under 4%. This means that teachers under, say, 40 will be paying more now, but when they go to retire, the fund will not have enough money for them, because it will have earned 8% per year on contributions. Like all Ponzi schemes, a pension system based on the assumption of 8% annual return on investment needs increases in contributions every 10-20 years unless inflation is rampant.

    If you are 60 years old, the pension system did not make enough money on your contributions to pay you. They made a lot of money with your contributions, but they paid it out to others for healtcare or early retirments or did not make as much as they promised you they would. So they want to hit up the young teachers — make them pay extra –so there will be enough for you as well as them. The contributions the young teachers make weren’t lost in the market; they haven’t even make them yet. But they are the ones being asked to cover obligations to older teachers like me.

    Nationwide, estimates of shortfalls in public pension systems are 2 trillion dollars. Going foward, the shortfall will be much greater if the stock market performs less well, which is possible.

  8. Maggie
    December 10th, 2009 @ 10:48 am

    Please do NOT change the defined benefit plan… it’s a huge attractor to folks and a reason why many of us STAY here!

  9. Ruthalean Thornton
    December 10th, 2009 @ 12:11 pm

    Given I am at an age that I am eligible to retire at any time, I would also like to say “thank you, Larry,” for your efforts in behalf of retaining the current retirement benefits for all of us at The Ohio State University. I have been with OSU for nearly 30 years, and again, am one of those who pursued employment with OSU and stayed here because of the excellent benefits provided. What some people who think State employees have all the advantages (and we certainly are very fortunate) may not realize is that for those of us who have accumulated some Social Security benefit (especially in my age group), in 1985, the Social Security began penalizing us upon retirement from State employment by cutting those Social Security benefits earned–in my case by at least one-half. This did not apply to the private sector, as my husband will receive his full company retirement, as well as his full amount earned under Social Security. Again, thanks for using your position and authority to advocate for those of us who have a “lesser voice.” You are appreciated. Ruth Thornton

  10. Ted Welch
    December 10th, 2009 @ 1:50 pm

    I would echo what Mr. Reiss said that it hardly seems fair to continue to ask younger workers to bare the cost alone. At the very least young workers should only be asked to share the cost, while retirees share the cost by accepting a reduction in benefits. Otherwise, you are asking younger employees to accept a reduced standard of living now and have accumulated less at retirement than their predecessors. They will already bare that inequity most likely with higher taxes in the future than we pay now.

    I would also have to disagree that the cost of the defined contribution and defined benefit are the same. If that were so, staff ARP participants would not have a portion of the university’s match; albeit a small one, go toward funding the defined benefit plan. I notice that now the 0.77% of pay is accounted for as coming out of each staff members pay to pay for past obligations, but the fact is 14% of pay goes into OPERS for the defined benefit plan for each participant and only 13.23% of pay goes into the defined contribution plan per each participant with the other .77% going into OPERS.

    The disparity for faculty is even greater with 3.5% going toward STRS for each ARP participant. If the defined benefit plan can deliver the same income with 46% lower costs as the article states, why the disparity?
    Are Ohio’s plans just that much more poorly managed than the average? So as Mr. Seiber said, will this disparity increase with any changes to the current plans? Finally, if ARP participants supposedly get an inferior retirement product, no medical care etc., then why do its participants not get the full funding to at least attempt to make up for it? Is that equitable?

    While I see the need for the continuation of a defined benefit plan for some people it should not come at a greater cost than the defined contribution plan and at the expense of its participants.

  11. David Pritchard
    December 24th, 2009 @ 1:22 am

    Larry,I’m retired from the U.S.Navy. Under current rules if I receive a pension, I can not buy up to (5) years military time. My proposal is to change the current law to allow myself and other pension veterens to buy (1) month for every year of service. Example: 20 years = 20 months of buy-into OPERS. 25 years = 25 months ETC. With a max of 30 months. I further recommend that this option must be completed no later than (5) years prior to retirement from OPERS.

  12. Lee Adams
    December 29th, 2009 @ 11:56 am

    As a recent retiree into OPERS,I find it interesting that the politicians want to raid the retirement systems to cover for their inability to protect the assets of the taxpayers of the State of Ohio. They do it because they think its the easiest thing to do. I also find it humorous that the people who denounce defined benefit plans are the ones who want that money. It seems that many people assume that retirees like me somehow got richer when I retired. My yearly pension is LESS than what I made while I was working. I am having to supplement my retirement income with income from other sources. Please do not compare people like me with the politicians and high level administrators of state agencies who do the ‘double dipping’ and get richer at taxpayer expense. Why should one’s standard of living decline upon retirement? It seems that some feel that is appropriate. Oh, I worked in the private sector for years. I paid thousands and thousands of dollars into Social Security to help support people like my parents when they retired. I will get little if any Social Security benefit because I draw a state pension! Sound familiar Mr. Reiss and Mr. Welch? I would love to have that money to supplement my income. We do have to sacrifice some things now so we can have something later in life. Mr. Lewellen is correct,defined benefit plans are being attacked because government and private entities see it as an easy way to cut costs quickly,not because it is beneficial in the long run.
    As far as health care is concerned, I would agree that some adjustments need to be made to control costs incurred by the system. However,remember we ALL get old and sick. If adequate healthcare coverage is not available through the retriement system,you the taxpayer will pay when people start going on Medicare or Medicaid or showing up in the emergency room.
    Finally,don’t compare PERS with all those other retirement systems across the country. Compared to many,PERS is in good shape considering the recent economic downturn. That by the way was largely caused by people who wanted to ‘get rich now’ and didn’t care what happened next week.