As the saying goes, you’ve got to know when to hold’em and when to fold’em. Evidently, OPERS is going all in on its bet to supposedly save Ohio’s largest pension fund with minor tweaks alone to the defined-benefit system. It’s a high stakes gamble with billions of dollars on the line. Understandably, there are many opinions on the issue.
U.S. Senator Orin Hatch (R-Utah) recently released a comprehensive report on the status of state and local defined-benefit pension plans across the nation—reflecting the national scope and severity of the issue. The report correctly points out many of the ongoing problems that defined-benefit plans have created, namely, $4.4 trillion in unfunded liabilities. It also suggests a solution: defined-contribution plans.
Naturally, OPERS disagrees.
To their credit, OPERS’s reform proposal would temporarily improve the health of its pension fund, which currently has $18.9 billion in unfunded liabilities (collectively, Ohio possess $66 billion in unfunded pension promises). By adjusting the retirement age, service length requirements, benefit formulas, and final average salary calculations, OPERS hopes to save the system.
It’s a strategy that has been used in the past—which also explains why we have a crisis today. Piecemeal reforms have not matched the severity of the problem. Ohio, notorious for inside-the-box ideas, must be forward thinking and push for a long-term solution, lest we find ourselves here again.
Public pension reform largely boils down to the issue of risk. With today’s defined-benefit systems, public employees face zero risk; they put in their time and receive their guaranteed pensions. Private-sector employees face dramatically more risk securing their retirement income—an income that is also far less generous than that received by career government employees. Feel free to compare your retirement to that of career government employees here.
Fiscal success or failure for defined-benefit plans is largely determined by investment returns. Every year, OPERS wagers that it can achieve an 8.0 percent return on its assets. While that was attainable during the boom years of the 1980s and 90s, today is different. Just ask California’s pension system (free subscription required to view). CalPERS assumed rate of return came in 6.65 percent UNDER expectations. Unsurprisingly, as investment experts indicate, CalPERS, like other state retirement systems, will likely struggle to reach their long-term investment return goals over the next decade. When investments fall short, unfunded liabilities grow and the burden is ultimately left in the laps of taxpayers.
How about a compromise?
A solution that is gaining national momentum is that of mandatory “hybrid” pension plans—a plan that combines a limited defined-benefit pension and a defined-contribution 401(k). Public employees would still have a level of guaranteed retirement income through a capped defined-benefit pension (indexed to Social Security) along with a 401(k) to provide for any excess retirement benefits.
Everyone has some skin in the game. Public employees are guaranteed a base retirement income and taxpayers are not left solely on the hook for million dollar retirements.
It’s an idea that has bipartisan support. Rhode Island overwhelming passed a nearly identical plan two months ago; California is considering a transition of its own. They’re doing so because, despite OPERS’s constant claims, they save taxpayer dollars and reduce risk.
Public pension reform is badly needed, and Sen. Hatch is correct to point it out. While dialogue from OPERS is also welcomed, it is woefully inadequate in addressing the high-risk and highly expensive long-term fiscal impact that defined-benefit plans create.
True pension reform should provide retirees a strong, long-lasting foundation of retirement income without breaking the backs of taxpayers. Instead of building that foundation, OPERS’s reforms largely just reshuffle the existing deck and leave public employees and taxpayers with a financial house of cards, awaiting the winds of future fiscal crises.