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Ohio’s pension systems should be emulated instead of criticized

Posted on | July 14, 2010 | 3,395 views |

When independent analysts discuss responsible fiduciary stewardship over state pension systems, Ohio is always near the top of that national list.  Recent news articles in Ohio on public retirement systems may have confused the status of our,  Ohio retirement systems with those in other states. I want to be sure we focus on Ohio and have a clear view of what we need to do.

Alarm bells have been sounded for the pension systems in such states as Illinois, California and New Jersey, among others, whose ability to pay out over the long term has been rightly questioned.  There are no such alarm bells in Ohio, but alarms will sound in the future unless action is taken today.

By law Ohio’s five pension systems are required to cover their liabilities over the long term. Regulations interpret that to mean liabilities have to be paid off within a 30-year window. For STRS (the State Teachers Retirement System of Ohio), it is currently at “infinity,” though STRS has a proposed set of changes for the current legislative session, which will get close to 30 years if passed soon. OPERS (the Ohio Public Employees Retirement System) is already in good standing but also has a set of proposed changes to maintain its standing. Those have been communicated to you over the past six to eight months by the retirement systems, and we hope they will be moving into the legislature in the near future. The changes being proposed by each system do extend the retirement window and make reasonable adjustments to benefits, but as proposed are quite necessary and do make the systems viable on a continuing basis.

In a Pew Center for the States report on public pension systems in February, Ohio was given a “solid performer” mark, the highest achievable in the report, for its liability and retiree health benefit funding. The pension stewardship in this state should be commended. The study was conducted prior to the recession, to be sure, but it is still relevant that Ohio went into the recession with sound, well-managed retirement systems, and as noted have proposed changes to remain sound.

In this current economy of stagnating wages, job cuts and salary freezes, pensions are a way for public employees to invest in their own retirement security, and it’s disconcerting to see such heavy criticism of public pensions recently, using words such as “lavish” to describe what for many public employees is anything but. As I noted in an earlier column, the average annual payout to Ohio pension retirees is $23,535.

The design of defined-benefit pensions also helps keep retirees above the poverty level, and nationwide that resulted in $7.3 billion in public-assistance savings in 2006 (about 8.5 percent of the total). Older households with defined-benefit pensions are six times less likely to be poverty-stricken, according to a 2009 National Institute on Retirement Security study.

Ohio public employers do not make contributions to Social Security for their employees; the employer contribution to the public retirement systems substitutes not only for the employer retirement plan but Social Security as well. The comparisons are often either stated incorrectly or stated vaguely. It’s also important to remember that public employees in Ohio contribute a significant portion of each paycheck toward their future benefits.

And, when examining costs, the total compensation picture needs to be examined. Public employees earn less in cash compensation and more is deferred into retirement — shouldn’t that compensation profile be emulated by the private sector rather than criticized?

Along that line of analysis, NIRS also announced the results of a study in April that looked at the past 20 years of compensation among public (local and state) employees and those in the private sector in comparable jobs, using US Bureau of Labor Statistics data. It found that state workers typically earn 11 percent less than their private sector counterparts, and even after benefits were included, local and state public jobs still earned 6.8 percent less. Pension benefits are an important tool to attract top-quality employees to the public sector when salary is not commensurate.

The public should also know that for every dollar paid out in pension benefits, $1.33 was returned to the Ohio economy, much of it in the form of the jobs supported by the money being spent in Ohio. The pension systems, much like Ohio State, act as tangible economic engines.

Drastic changes to the STRS and OPERS systems, which have a combined $127 billion in assets, are not what are called for, especially when hundreds of thousands of retirements across the economic spectrum are at stake. The reasonable adjustments proposed by the systems will bring long-term stability. Retirees, employees and employers will all be required to make sacrifices in the near-term to ensure a stable future is available after public service.

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