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.
The Buckeye Institute will never be pleased until ALL public pension systems turn into defined contribution systems or simply revert to Social Security as they care not for the worker.
Thank you John
The proposed reforms to STRS Ohio do not protect those retired educators who receive the smallest pensions. To cut these older retirees COLAs for one year, then reduce the COLA to 2%, is
unconscionable. Teachers making $30,000, or less, annually in pensions should not have to face such a hardship. STRS needs to protect them, period.
I am an employee in a public school system here in Ohio, and I realize that I will take a personal financial hit if these reform ideas are instituted. However, I also realize that something HAS to be done. It’s time to stop looking out for #1 and look at the big picture. Major changes are going to have to take place across the board to fix this mess, and yes, I am aware that things can’t skip along the way they have in the past. The way the money has been handled is deplorable, both by our state and our federal government as well (i.e. GSA and Social Security). However, the hard truth is the damage has been done and now deep reform is a must, not an option. It’s going to be painful no matter how you stretch it. Also, maybe it’s time for public employees to get “up in arms” about the misuse of funds by the unions as well. Union reps vacations to Hawaii, Vegas, all expense paid trips to inaugurations and inaugural balls, large ticket black tie events supporting the Democratic party, etc., on monies generated by the dues of hard working public employees, needs to cease. It is time for an end to the fluff across the board, and it is long long overdue.
Amy,
The “union” didn’t misuse our funds(like many people like to falsely blame), our investors (like investors in other state and local retirement funds) lost their hind ends (and ours) with stock market investments when the stock marked took the dive. Social Security is far more solvent than many state retirement systems right now and Social Security even quits collecting contributions (unlike state retirement systems) when the worker’s annual income reaches a little over $108,000. Just think of the great shape Social Security would be in if the wealthy had to pay for their entire income like state public servants have to.
AGAIN as on Wall Street, The incentative bouses have taken down the average salary teacher and the rich continue to get rich from the common person. Why don’t we talk about the billions given out by STRS to manage the common teachers retirement. Or let’s talk about the Higher education salaries. Why pick on the common teacher.
56,000 starting pension? In whose universe???? I suppose if you average in superintendents and principals and teacher’s from affluent districts….with the teacher’s who are retiring from rural districts and poor districts who may not hit 56,000 for top pay. This is garbage…you are giving the public inflammatory information. I retired 10 years ago and my pension is nowhere near that. Our health care is falling apart, premiums and costs continue to rise, the cost of everything continues to skyrocket and STRS wants COLA cuts….fine, let’s do it for those that have the 56,000…the rest of us need the COLA,,,,take more from those of us over 60 who are unable to change our financial status and we will be seen begging for handouts from our former students. (most of whom make more money than I ever did!)
I believe “Retire/Rehire” should be banned. It’s hurting our retirement system and those who are trying to advance.
Interesting comments. I am one of those STRS retirees that worked in rural OH and had to leave the system at 25 yrs., due to serious health reasons. This income is very challenging. I still believe that STRS SHOULD be immediately stopping those 35/88 promises and this would HELP our issues in this system. Noone can tell me that this cannot be done, they quit on retirees all the time. There seems to be waste everywhere. But taking our COLA’s is NOT the answer. How are we supposed to be keeping up with inflation????????????????????? One good answer is get rid of the 35/88.
Retire/Rehire should definitely be banned. How do these people expect college grads to get jobs in the education field? How would they have felt if it had happened to them in their days of early employment? I know a principal who planned to do this. The whole community negatively responded and he retired in the proper way. How do I know this? I heard people in the community talk about it, somewhat embarrassing me, in the beauty shop where I get my hair done once a week. It is too bad the community had to face this decision and carry on conversations such as this concerning the educational occupation.
I believe every STRS member understands that sacrifices need to be made. However, why are those who can least afford to give back, STILL included in this reform? Two of the other pension systems in the state are recommending that older retirees be left out of the equation. Why can’t STRS do it? Where does OEA stand with it’s retirees? Did I pay dues for 32 years, only to get “run over” by the bus when I retired? OEA-R remembered to send me an application for retirement membership. Where are they for all of those retirees who DID join, unlike me?
Teachers who retired prior to the enhanced benefit changes put in place after 1999 by the OEA dominated STRS Board earned pensions far below the $56K figure cited in this article! The one year COLA freeze and subsequent 1% reduction in the COLA will have a draconian impact on these older retirees who are already living on very limited incomes. No provision was made to protect their economic future. Upon passage, the proposed legislation will immediately impact their income while those teachers just approaching retirement (and earning significantly higher salaries) will have years to prepare for the reductions as the legislative changes impacting their retirement are “phased in”. To their disgrace, the STRS Board has abandoned those receiving the smallest pensions while favoring those receiving the most.
While protecting the ones that can least afford it is important, remember that our pension system is NOT a government entitlement or social welfare system. What we draw from the pension system in the form of a benefit is based on what we have put into the system during our careers. With that in mind, treating one group differently than another cannot be accompished in a fair manner. STRS has been in business since 1920 and has NEVER missed a benefit check. Of course it needed tweeked. But to overhaul it by changing to a Defined Contribution Plan would be costly to both the individual retiree and the state. The winner would be those investment firms that are clamoring for the change and the people who are drinking their kool-aid.
Retire-rehire has almost no effect on the solvency of the system.
People retire and go back to work everywhere. Ask the politicians. Ask professional athletes. Ask judges, military retirees, etc. Gov. employees like teachers are easy targets. Look around.
Your critique of the pension system is CRITICALLY flawed.
You complain that the employer contributes 14% of pay to the pension plan vs. 10.2% for the private sector on average. Frankly, the numbers I’ve seen for the private sector are actually 9.2%, lower than you claim. But the problem is that most of the private sector payments go in to directly fund that individual worker’s benefits. Ie, my employer’s match into my 401(k) is MY money. They can’t take it away. I can lose it by gambling on risky investments, but it can’t be taken away, and it goes to fund MY retirement.
With the pension plan as it has been changed, this is NOT the case for teachers. Most of that 14% actually is siphoned off to close the existing funding gap, as are much of the returns on the investments. In other words, a teacher coming in today doesn’t see benefits worth anywhere what their contribution plus a 14% employer contribution could provide.
In fact, a new female career teacher in our local district, receiving the current masters pay scale (including step increases) increased with inflation (they actually haven’t received that for years), would need to achieve about a 6.94% annual return on JUST their own 14% contribution to achieve a benefit equal to their current pension promise. Increase that total contribution to the 28% you are pretending it to be and the necessary rate of return drops to 4.462%. Put the total contribution to 24.2 (their 14% plus the 10.2% employer side you’re claiming), and the necessary rate of return is 4.989%.
What you are doing is simple, yet VERY deceptive. You are falsely leading people to believe that the 14% employer contribution goes to the individual being employed – it doesn’t. It goes to pay for benefits for current retirees. The current employees are getting a MUCH, MUCH less generous deal – in fact, based on those necessary rates of return, you could easily argue they’re getting a raw deal.
A 6.94% annualized return on investment is NOT hard to achieve. It used to be easier, but a conservative or moderate balanced portfolio has easily still obtained those sorts of returns over the past decade.
You’re attacking current teachers saying their benefit is too rich when that is FAR from the truth.
Why don’t we just add your parents’ social security check to YOUR annual compensation and accuse you of making that money? It is NO different than what you have done here.
FOR SHAME.
Mike: Then would you be in favor of a defined contribution system so they could receive the full benefit of their money? It seems you are arguing for the policy position we would be supportive of by saying one would earn more if they kept THEIR money.
Obviously, in a defined benefit system it doesn’t really matter what rate of return is earned. The state is on the hook for paying out the statutorily defined benefit. If the rate of return fails to meet the obligations either the employee or the employer (in the public case, taxpayers) must make up the difference. Now you are right, the state can always change that guaranteed benefit and thus reduce the effective rate of return an individual paying in has ultimately earned, but they must get what is promised in statute.
You do point out one of the central flaws of the program which is it’s somewhat “ponzi” like structure where current workers are paying for current retirees. Therein lies the issue that a defined contribution system would fundamentally resolve. At that point the money becomes an individual’s and cannot be taken away through potential statutory changes that are made to decrease the effective cost of a defined benefit.
Yes, I would be in favor of a defined contribution system where the state was mandated to contribute an amount equal to the average private sector corporate contribution, as would most younger employees when they see how badly they’re being ripped off – it would actually mean an improved benefit. And trust me, most of the younger teachers know that they’re getting a terrible deal, and it REALLY rubs them the wrong way when you accuse them of getting generous benefits.
Such a change would also keep manipulative folks like those at the Buckeye Institute from falsely portraying the benefits as “generous”.
Unfortunately, despite all your rhetoric, YOU are the ones who don’t want to see that change. The second you make that change, those teachers are no longer filling the funding gap and the state itself is going to have to pony up that cash. That means a significant increase in cost to the state. You could keep the 14% district contribution the same and split it 9.2% to the employee and 4.8% to patch up the funding gap for the pension system… but you’re going to be missing out on the ability to confiscate part of the returns of those on the defined contribution side. That makes up a HUGE portion of that funding needed to close the overall gap. I believe their assumed rate of return is still 8%, no? Give an 8% return to the new teacher in our district with their own contributions and that 9.2% match (again, equal to the average private sector), and you’re looking at around $140,000 net present value increase in their pension benefits. At 8% returns, the future value there at retirement is near $2.4 MILLION.
The discount rate needed with that 9.2% match to get a benefit equal to the current pension promise is just 5.14% – meaning that about 35% of all the returns that would otherwise go to the teacher if they were in a defined contribution plan are being taken by the state to fund that gap.
So, once again – the younger teachers are being promised a benefit WELL below what the average private sector defined contribution plan would get them, but you’re portraying them as getting too generous of a benefit.
I’m not denying that there are still problems with the way that the pension plans are set up. But you’re falsely attacking people, and that is despicable.