The Buckeye Institute’s recent Hanging by a Thread report highlights the woeful unfunded liabilities encountered by our five state pension funds, to the tune of $66 billion.
This is a real problem and the problem is the system itself.
There are may reasons for why this number is so high, but a big one is that, simply put, defined benefit plans such as those offered by the pensions result in very generous retirements that far exceed the typical retirement of a person working in the private sector.
One way this happens is through what is known as “spiking.”
The pensions determine the amount of a pension by looking at the three highest years of compensation earned by an employee. “Spiking” occurs when a person goes from making something like $50,000 to $75,000 for their last several years of service. Their pension will be based on $75,000 as opposed to an average of the overall time an individual spent in public service.
This brings us to the case of Joyce Beatty.
Joyce Beatty used to be the leader of the minority party in the Ohio House of Representatives. She made a salary of around $86,000.
Upon leaving the House, she was hired by the Ohio State University as senior vice president of outreach and engagement at a salary nearly four times higher than her salary as a legislator- $326,000.
Now she is leaving that position to run for a newly created Congressional seat in Franklin County. Obviously, there is nothing wrong with that, but she is now going to get a state pension based on her $300K plus job. That could be up to $211,000 a year plus an annual 3 percent cost of living adjustment (COLA). Additionally, if she wins election to Congress, she will also be able to get a federal pension on top of the state pension. This is not chump change folks.
None of this is meant to take a shot at Beatty. What she is doing is completely legal and is not different in kind from what many others do on a regular basis. It is, however, meant to show the absurdity of the system as it currently stands.
We all want public employees to have good retirements. There is a nagging question though. How likely is it that public employees will have good retirements when the system itself promotes outcomes that will likely leave either future pensioners worse off or lead to the need for more taxpayer money to keep them solvent?
Remember, the five funds are underfunded by $66 billion. Every example like this one shows why that number will remain unacceptably high without fundamental reform.
It also needs to be pointed out that there is currently pension reform legislation pending in the Ohio House of Representatives. This bill, House Bill 69, tweaks the current system. It increases the look back period for determining the final average salary, increases the retirement age and modifies the guaranteed 3 percent COLA.
These changes are to be welcomed as an improvement from where things stand today, but they are inadequate to the task of truly reforming the system. To a large degree they attempt to preserve a status quo that, in the long-run, cannot be preservable.
It would be far better to embrace the recommendations made in the Hanging by a Thread report of shifting public workers into a defined contribution (DC), 401(k) like system or a mandatory hybrid that caps the defined benefit portion at the maximum Social Security benefit with the rest flowing into a DC plan.