The State Teachers Retirement System (STRS) of Ohio recently released its fourth reform plan to address the significant fiscal challenges facing the system ($43 billion in unfunded liabilties). As the Ohio Senate prepares to tackle public pension reform legislation as early as next month, it’s important to discern the positive aspects of STRS’s proposal and areas that need further reform.
Below are the key components of STRS’s proposal:
Increase in member contributions from 10 to 14 percent of salary.
STRS is correct not to ask taxpayers to bail out the pension fund through higher employer contribution rates (although STRS’s original plan did include a taxpayer bailout that was later removed). Taxpayers already contribute toward teachers’ retirement at higher rates (14 percent of salary) than do employers in the private sector (10.2 percent average).
If retired teachers are to continue to draw generous, guranteed pensions ($56,000/year starting pension for career teachers according to STRS’s 2011 CAFR) teachers, not taxpayers, should provide the funding to do so. A more equitable reform would be to decrease the taxpayer 14 percent contribution down to the 10.2 percent average private-sector contribution.
Increase retirement age to 60 with 35 years of service.
Currently, a teacher can retire at any age and receive full pension benefits with just 30 years of service, making it possible for some teachers to retire in their early 50’s. With increasing life expectancies, it is highly conceivable that a large number of retired teachers spend as many years drawing pensions benefits as they spent teaching in the classroom. Raising the retirement age and service requirements (although not fully implemented until 2026) begins to address this issue, but the system is still more generous than what many private-sector workers receive.
Typing pension eligibility to Social Security eligibility would be a better reform that would save significant taxpayer dollars. Private-sector workers must wait until 67 years of age to receive full benefits from Social Security. Teachers could still retire after 35 years of service but their pensions would be untouchable until they have reached 67 years of age.
Increase the number of years in final average salary (FAS) calculations from three to five.
The three-year FAS calculation is easily manipulated by employees through the process known as double dipping and is deserving of reform. While a five-year FAS calculation is an improvement (although somewhat arbitrary), transitioning to a career-based FAS calculation is a more permanent, cost-effective solution.
Reducing the cost-of-living adjustment (COLA) from three to two percent.
Reducing the cost-of-living adjustment from three percent to two percent better reflects changes in the prices of consumer goods and services. It also is a powerful tool for controlling costs.
A better reform would be indexing COLA increases to changes in the consumer price index, with a cap set at two percent. Another idea is to suspend COLA increases until the STRS pension fund achieves an 80 percent funded level, as was recently done in Rhode Island.
Reduction in benefit multiplier for those with 30-plus years of service.
Reducing the benefit multiplier to 2.2 percent for each year of service, not just the first 30 years, is a prudent step that reduces high-end payouts to career government employees. A more robust reform would be a decrease in the multiplier across all lengths of service. As STRS pension are quite generous, a broad-based reduction in the benefit multiplier would help bring pension payouts back in line with private-sector equivalents.
Overall, STRS’s reform proposal is a modest improvement to a deeply flawed system. While making adjustments to benefit formulas and contribution rates does improve the fiscal health of the fund, the reforms do nothing to alter the defined-benefit structure. Any reform is better than the status quo, but reforming from within the defined-benefit system alone will not produce the type of reforms that taxpayers expect and deserve.
Legislators face two divergent paths on public pension reform. Path one, the STRS model, tamps down the crisis only temporarily. Minor tweaks and changes may be enough to allow the system to get by for now, but they cannot guarantee long-term stability. And in the end, it’s still the taxpayer that is ultimately held responsible for closing the gap.
Path two is the route that forward thinking states such as Rhode Island, Virginia, and California are pursuing. Instead of reforming just enough to live another day, these states have tackled the defined-benefit structure itself, and in doing so, will save taxpayer dollars, reduce the risk on taxpayer investments, and still provide reasonable benefit levels to former government employees.
That’s the choice that Ohio faces. STRS’s plan leads us down the familiar path of using timid solutions to address serious problems. The more robust reforms that we articulate better address that serious challenge that Ohio faces.