Historically, public pension funds have invested the majority of their fixed assets in fixed income investments such as government and corporate bonds. Government bonds and highly rated corporate bonds are considered safer investments because their realized rate of return is unlikely to be too far above or below expert predictions. From the early 1980’s onward, pension plans began shifting large portions of their portfolios away from fixed income securities and toward equities (The Pew Charitable Trusts, 2014, pg. 2). More recently, in search of higher returns, pension plans have been turning to alternative investments. The focus has mainly been on hedge funds (investment pools in high risk assets that are aggressively managed for big or so called absolute returns) and private equities (money pooled with the purpose of buying companies with the goal of selling them or taking them public for profit) (The Pew Charitable Trusts, 2014, pg. 6).
In 2013, state-run retirement systems faced a $968 billion shortfall between pension benefits promised to government workers and the funding needed to meet those obligations, a $54 billion increase from the previous year, according to a brief released in July 2015 by The Pew Charitable Trusts (The Pew Charitable Trusts, 2015).
The brief, “The State Pensions Funding Gap: Challenges Persist,” examines data from 238 public sector retirement plans across the 50 states for 2013, the most recent year for which complete data was available. Pew also found that preliminary data from 2014 point to some improvement, with a reduction in unfunded liabilities for the majority of states. This is due in part to new accounting standards requiring investment losses or gains to be disclosed in the year they occur rather than over time. Yet, the study found that state pension debt projected for all states in 2014 remains over $900 billion, at a level higher as a percentage of U.S. Gross Domestic Product than at any time before the Great Recession.
Thirty cities located at the center of the nation’s most populous metropolitan areas faced more than $192 billion in unpaid commitments for pensions and other retiree benefits, primarily health care, as of fiscal 2009. They are employing a variety of strategies to address these shortfalls. For example, New York, the nation’s largest city, accounted for more than half of the total retirement shortfall. But retirement underfunding looms as a long term budget stressor across a wider array of the cities, when looked at on a per household basis. New York City, responsible for not just a large number of municipal employees but also multitudes of teachers, had unfunded pension liabilities of $14,302 per household. Pension shortfalls per household were next highest in Philadelphia at $12,170, Portland, Oregon at $11,389 and Chicago at $11,110 and pose a significant challenge for policymakers, and ultimately taxpayers (The Pew Charitable Trusts, 2013).
Problem Issue — Ohio’s Crisis
A profound fiscal crisis is threatening Ohio taxpayers. Every Ohioan should be able to enjoy a fulfilling and financially stable retirement. Ohioans in the public and private sectors alike should expect a level of retirement income that allows them to comfortably live their remaining years without fear of financial hardship. However, guaranteeing that public employees receive a level of retirement far beyond that of private sector employees, especially when financed by taxpayers, is unfair and has proven fiscally unmaintainable (Schwiebert, 2011, pg.1).
According to the Buckeye Institute’s study done in 2011, if every Ohioan received a pension similar to the Ohio Public Employee Retirement System (OPERS) career pension of $39,780 it would cost current workers over $123 billion per year, which equates to 25 percent of Ohio’s Gross Domestic Product ($483 billion). On a per capita basis, it would cost working Ohioans $26,851 per year to fund the pensions of retired Ohioans. This cost would devastate Ohio’s economy. However, if changes are not made to public pensions, the required tax hikes to bail them out would be equally overwhelming (Schwiebert, 2011, pg.1).
Ohio’s five public pension systems are tasked with providing retirement benefits to Ohio’s public employees at a reasonable cost to taxpayers. Yet, as time as shown, Ohio’s pension systems have produced retirement benefit levels that frequently exceed those of private sector Ohioans. To finance these substantial benefits, Ohio’s pension funds have run up extraordinary amounts of unfunded liabilities for which, in the end, taxpayers are legally responsible.
According to The Pew Charitable Trusts, Ohio failed to consistently pay its full annual pension contribution from 2005 to 2010. The system was 67 percent funded in fiscal year 2010 and faced a $58 billion funding gap. Most experts agree that a fiscally sustainable system should be at least 80 percent funded. Ohio’s retirement plans had a liability of $218 billion and the state has fallen $87 billion short in settling aside money to pay for it (The Pew Charitable Trusts, 2012).
Even with the passage of the 2012 pension reforms in Ohio, they do little to address the systemic problems that created this gulf in the first place. Specifically, Ohio lawmakers passed reforms aimed at each fund’s problems through individual pieces of legislation. Although each bill was different, the main thrust of the changes involved increasing employee contributions to the funds, modifying the calculation and determination of benefits, and increasing the retirement age. These are positive changes, and they will curb the rate new liabilities are created while facilitating the payoff of existing obligations. As a short-term solution they are likely to make a reasonable dent in the mounting shortfalls. However, they do nothing to address the system that allowed such extreme shortfalls to occur in the first place. The very nature of defined benefits pensions allows liabilities to completely eclipse what the system can pay for. Conversely, defined contribution plans limit their liabilities and are categorically incapable of reaching such disastrous levels. In the interest of protecting Ohio taxpayers from runaway costs and public employees from totally insolvent pensions, a restrained and reasonable system is needed.
I examined four studies completed on pensions and pension reform. I drew my analysis from these works: Harvard Kenney School Mossavar-Rahmani Center for Business and Government, “Underfunded Public Pensions in the United States: The Size of the Problem, the Obstacles to Reform and the Path Forward”; Brown Center on Education Policy at Brookings, “Pension Politics: Public Employee Retirement System Reform in Four States”; The Buckeye Institute for Public Policy Solutions, “Hanging By a Thread: Big Payouts and Promises Leave Ohio Pension Plans on the Brink of Collapse or a Massive Bailout”; and The Pew Charitable Trust, “State Public Pension Investments Shift Over the Past 30 Years”.
In 2010, combined unfunded liabilities from Ohio’s five pension systems reached over $66 billion averaging out to $5,725.82 owed by every Ohioan. This was 118 percent of Ohio’s biennial budget. As mentioned above, Ohio’s pension funds were only 67 percent funded leaving only 67 cents of assets to pay for every one dollar of liabilities. If nothing is changed, three out of the five pension plans will never be able to pay off their accrued liabilities. They will continue to sink deeper into debt.
There are several reasons why Ohio’s pension plans are on the verge of fiscal failure. There are the growing numbers of retirees, the increased retiree life expectancy, runaway increases in benefit levels, and weaker investment returns. Several funds have seen double digit increases in the size of their retiree pension pools over the past decade. Larger retirement rolls means greater total pension payouts for each of the funds. This is intensifying the existing funding challenges. Adding to this problem is increased retiree longevity, since retirees are living longer than ever before, drawing guaranteed pensions for decades after they end their careers of service. Monthly pension benefits for career employees have also increased over the past decade anywhere from 12 percent to over 40 percent. These increases have contributed to lifetime public employee retirement packages in excess of $1 million. Weaker investment returns over the past decade have done substantial damage to the overall health of each pension system. For each of the pensions, the rolling five-year and ten-year return rates fail to meet their investment return targets.
According to Carl Van Horn’s Working Scared, the overall condition of the American economy has changed drastically during the past twenty years. Along with the more recent Great Recession, its impact on American workers has taken its toll. In chapter 3, he talks about the new terms between American employers and their employees. Relationships between public employees and their government employers have been altered in ways that seemed unimaginable just ten years ago. A fiscal crisis caused by political leaders who allocated more funds than they collected in revenue worsened during the Great Recession and the federal government plunged into even deeper financial trouble (Van Horn, 2013, pg.50).
Furthermore, retirement and health care benefits for teachers, police officers, and government managers were also cut. In more than half the states, public sector employees were required to contribute more of their salary towards pensions and health care premium. In 2011, Democratic governors in New York, Oregon and Connecticut pressured public employee union workers to make greater contributions towards their pension benefits.
Conversely, to further understand these five retirement systems in Ohio, I will discuss each one in more detail below. Also to measure the health of the retirement systems (according to OPERS), is to compare the ratio of unfunded actuarial accrued liabilities (UAAL) to active employee payroll which means the smaller the number, the stronger the pension system. Over the past two years, UAAL (as a percentage of active member payrolls) has increased from 21 percent to 154 percent. Also, data was pulled from the most recent Comprehensive Annual Financial Report (CAFR).
Ohio Public Employees Retirement System (OPERS)
As mentioned above, there are five pension systems in Ohio including OPERS, which is Ohio’s largest public employee retirement system with nearly 954,000 members. For every $1.00 it owes to retirees’ pensions, it possesses only 75 cents in assets. These 75 cents per dollar ratio translate into an $18.9 billion unfunded actuarial accrued liability or a $1,638.28 tax on every Ohioan. However, it is recommended by many experts and the U.S. Government Accountability Office that pension funds should maintain at least an 80 percent funding level to be considered healthy. The growing number of retirees is draining OPERS. The number of retirees drawing benefits has surged nearly 17 percent in just five years growing from 149,296 to 174,637. However, the number of active contributing members decreased from 350,835 in 2004 to 341,777 in 2009, a drop of 2.6 percent. As new retirees grow, the pension system is forced to contribute more towards retiree benefits creating even greater demand for limited funds (Schwiebert, 2011, pg.5).
State Teachers Retirement System of Ohio (STRS)
This is Ohio’s second largest public retirement system with 470,000 members and $58 billion in assets. STRS has only 59 cents for every dollar that it owes which translates into a $38.7 billion liability or a $3,354.57 tax on every Ohioan. In 2010, UAAL percentage of covered payroll reached 351 percent which was twice as high as OPER’s numbers (Schwiebert, 2011, pg.9). The reasons for the increased costs are the same as OPERS. There are more retirees living longer and retiring with higher final average salaries. Between 2001 and 2010, the number of retirees increased by over 30,000 individuals which was a 30 percent increase, but the number of active contributors remained static. STRS has relied mostly on investment returns to make up for low funding levels and increased benefits. Their long term investment return goal is set at 8 percent; however the returns are short. Many of their gains were made under stock market bubbles that do not accurately reflect the current economy.
School Employees Retirement System of Ohio (SERS)
SERS has 126,000 plus active and 66,000 retired members; it is Ohio’s third largest public employee retirement system. Even though it is a defined benefit type system it has suffered the same challenges felt by the previous two systems discussed. In 2010, SERS had unfunded liabilities of $4.1 billion meaning there was a $355.39 bill for every Ohioan. This system is only 72.6 percent funded or rather only 73 cents exist for every dollar in liabilities. The causes for their fiscal distress were attributed to a crashing stock market in 2008. This led to huge investment losses. The ultimate driver of long term weakness is the growth in employee benefits (Schwiebert, 2011, pg.12). The mixture of a growing retiree base, ballooned benefit packages, and increased retiree longevity has caused total pension and health care payouts to rise steeply over the past decades.
Ohio Police and Fire Pension Fund (OP&F)
There are 57,000 active and retired police officers and firefighters in this pension system. OP&F had 73 cents for every dollar that it owed in liabilities which left the fund only 72.8 percent funded (Ohio Police & Fire Pension Fund, 2011). This shortfall added a $4.0 billion burden to Ohio taxpayers as they are the true last resort to fund pension deficits. To place this in context, if forced to pay off all of OP&F’s liabilities today, every Ohioan could expect a tax of $349.93 (Schwiebert, 2011, pg.14). Their UAAL, as a percentage of active member payrolls, was at 213 percent.
Ohio Highway Patrol Retirement System (HPRS)
Lastly, this is a retirement system for state troopers with over 1,500 members and over 1,300 retirees which mean it is Ohio’s smallest public retirement system. This has the same story as the previous four retirement systems mentioned above, a shattered defined benefit system, with swelling unfunded liabilities, huge employee pension packages, and the impending threat of a taxpayer bailout. The most recent actuarial valuation showed 66 cents for every dollar in liabilities, meaning a $319 million dollar unfunded liability. Thus, every Ohio taxpayer would have to contribute $27.72 to HPRS. When measured in terms of unfunded liabilities as a percentage of active payrolls, this pension system climbs sharply to 337 percent which is behind STRS in terms of overall pension weakness (Schwiebert, 2011, pg.16).
Alternative Solutions
According to Bickers and Williams, once a problem is defined, potential solutions can be identified. It is hoped that the policy analyst will determine these potential solutions based upon a thoughtful consideration of the institutional factors within which the policy will be implemented (Bickers & Williams, 2001, pg. 205). As I will describe below, here are possible solutions to the Ohio pension crisis.
Thus, with numbers like these, it is unavoidable that Ohio’s public pension systems need reform. Several of Ohio’s pension funds have already pleaded for reform in an effort to clean up their balance sheet. The defined benefit pension system has failed Ohio taxpayers, with $66 billion in unfunded liabilities. Here are some proposed solutions to the problem:
Proposed Solution One
One of the proposed solutions to the pension crisis in Ohio is moving government workers from a defined benefit plan to a defined contribution system. The transition will effectively end the practice of unfunded liabilities while saving taxpayers money and establishing more equitable benefit levels between the public and private sectors. This change would mean that all new government workers enroll in a defined contribution plan in which taxpayers contribute an amount equal to 10.2 percent pf employee salary. The 10.2 percent contribution reflects an amount equivalent to the private sector standard of a 6.2 percent Social Security contribution and a 4.0 percent 401 (k) match. This would save taxpayers $3.3 billion over the course of the next 30 years (McCleary, 2011). However, for existing government workers, access to their pensions should match that of Social Security meaning pension eligibility should begin at 62 for workers with 25 years of service; 65 for those with 15 through 24 years of service and 67 for those with 1 through 14 years of service. This better mirrors life expectancy and establishes greater equality with the private sector (Schwiebert, 2011, pg.18).
In addition, a sliding scale should be used to draw down the reliance of existing government workers on their defined benefit plans. For example, for workers within five years of retirement, the pension formula should be adjusted to reflect a five year final average salary; thus for workers over five years away from retirement, a more progressive rate would be used to more fully move to the defined contribution plan while allowing government workers the time to plan for any probable benefit adjustments. The end of the progressive rate would be a career based final average salary for workers with only a few years of government service under their belts, thus overtime would prohibited in the final average salary calculation as well as any other pay spiking components.
Proposed Solution Two
Another proposed solution is establishing an obligatory defined benefit/defined contribution hybrid. This would incorporate components of both defined benefit and defined contribution systems. Pension payments would be capped at the Social Security maximum benefit level while any additional benefit would be paid out of a 401 (k) established for each employee (Schwiebert, 2011, pg.19). A sliding scale would determine what level of contributions would be paid toward the pension fund and individual 401 (k). Determining how much the defined benefit would be could be directly connected to Social Security. Alternatively, government workers making nearly the same amount as private sector workers could receive a similarly sized defined benefit as private sector workers receive from Social Security. For example, the highest paid government worker in comparison to his or her counterpart in the private sector would only receive a defined benefit equal to the highest amount paid out of Social Security. In addition, after determining how much of the 10.2 percent taxpayers contribution would be needed to fund this retirement system, the remainder (in addition to their own contributions) would go into a defined contribution system similar to the Thrift Savings Plan (TSP) which is used by federal workers. Using TSP limits investment options, thus reducing the risk of government workers making unwise investment decisions (Schwiebert, 2011, pg.19).
Proposed Solution Three
According to a study done by Patrick McGuinn for Brookings, states should make their complete actuarial payment every year (McGuinn, 2014, pg. 39). Making the full annual required contribution (ARC) is an essential (if often not sufficient) condition for having a maintainable pension system. Employees make sound contributions to their pensions throughout their careers; it is deducted from their paychecks. States need to meet their obligations with the same regularity, meaning when payments are skipped or only partial payments are made, the unfunded liability in the pension system will grow quickly, especially if the stock market declines in value. Legislators typically look only at the short term and make quick pension fixes that resolve that year’s budget problem rather than address longer term structural issues in the retirement system. This is generally caused by personal political motivations. However, the longer that the unfunded liability continues to grow, the harder it will be to get the pension system back to a fiscally responsible position. By bending the cost curve, states can make it more manageable over the long term. Reformers should seek to make it a legal requirement that their state make its full actuarial pension payment every year and mandate legally binding action by the state retirement board and state legislature if the pension fund is severely underfunded (McGuinn, 2014, pg. 40).
Proposed Solution Four
Another solution would be to change the automatic three percent annual Cost of Living Adjustment (COLA) to a variable formula. The Social Security Act requires such a formula for determining each COLA, it is equal to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the year to the third quarter of the next year. COLA should be tied in some way to the Consumer Price Index (Ohio Budget Advisory Task Force Issue Paper, 2010, pg. 8).
Proposed Solution Five
Solution five entails banning employer “pick up” of employee’s pension payment. While it is appropriate for public employers to pay the employer portion of the defined benefit plan, it is not fair to require taxpayers to also pick up the 10 percent employee share. While such a practice may not be prevalent, it is extremely costly to cities, school districts and the State of Ohio. Legislators should ban the ability of public sector employers at the state and local levels to pick up the employee contribution. A phase-out period, over a reasonable timeframe, should be considered for employees now receiving this benefit. A compensation audit by the City of Columbus found that taxpayers will save $43 million each year by ending this practice (Ohio Budget Advisory Task Force Issue Paper, 2010, pg. 9).
Proposed Solution Six
Another proposed solution, is changing the “top three years” formula. Ohio public employees use the highest three years of income to help determine their annual retirement income. Some public employees are able to take advantage of this method by securing large end of career pay raises that raise payments for years to come. The Buckeye Institute pointed to a state legislator who was hired by a university at a much higher salary towards the end of her career which resulted in an increased starting pension payment from $54,212 to $211,200 a year (The Buckeye Institute, 2010, pg. 7). This three year provision is a loophole that must be closed as well as expanding the three year formula to at least five years ((Ohio Budget Advisory Task Force Issue Paper, 2010, pg. 9).
Best Alternative (Pros and Cons)
No type of retirement plan is perfect, all involve tradeoffs between cost, risks and retirement adequacy, and all involve different choices about who bears these costs and risks- employers or employees. Hence, I strongly believe that proposed solution two would greatly impact Ohio’s defunct pension systems. A hybrid system would provide a minimum guaranteed level of retirement benefits through the pension fund while simultaneously severely restricting out of control pension growth and minimizing the liabilities of taxpayers. This system would also provide government workers with a nest egg that could serve as an inheritance to their children and grandchildren.
Governor Lincoln Chafee of Rhode Island signed what remains the most comprehensive overhaul of a state pension system ever seen in the U.S. in 2011, establishing a mandatory hybrid system similar to the type outlined above has recently been enacted with overpowering bipartisan support in Rhode Island. According to Urban Institute’s Public Pension Project Brief completed in 2014, their most recent analysis showed that most public school teachers, the largest group of public employees in Rhode Island will fare better in the new hybrid pension plan than the former stand-alone defined benefit (DB) plan. Two thirds of teachers projected to be hired in 2014 will accumulate more lifetime retirement benefits in the new plan than they would have earned in the old DB plan. Teachers with relatively short tenures will fare especially well. All teachers with less than 10 years of service will accumulate more benefits in the hybrid plan than the former plan which requires teachers to work a full decade before earning any pension benefits. About three quarters of teachers with between 10 and 20 years of service will also gain from the new plan. However, most teachers with more than 25 years of service would have done better in the old stand-alone pension (Johnson, R, Butricia, B., Haaga, O. & Southgate, B., 2014, pg. 1).
According to a brief conducted in 2015 by The Pew Charitable Trusts, eleven states (Indiana, Washington State, Ohio, Georgia, Utah, Rhode Island, Virginia, Tennessee, Nebraska, Kansas and Kentucky) have adopted hybrid pension plans that combine smaller, defined benefit pensions with defined contribution plans. One of the states that have adopted such a plan is Tennessee. In 2013, Tennessee policymakers adopted a mandatory hybrid retirement plan for state workers, higher education employees and teachers hired after June 30, 2014. State officials designed the hybrid plan to increase the predictability of retirement benefit costs, ensure retirement security for career workers and provide flexible benefits for workers who do not stay in public service for their entire careers. Local governments were also given the option to move new employees into the state system (Tennessee Department of Treasury, 2013, pg. 1). Tennessee’s hybrid plan includes a defined benefit with a 1 percent multiplier, a normal retirement age of 65 and a defined contribution plan with an automatic combined contribution of 7 percent from the employee and the employers (Tennessee Department of Treasury, 2014, pg. 1). Under this plan, participants have 26 investment options: 15 index funds and 11 life cycle funds (Tennessee Consolidated Retirement System, 2014, pg. 6). State retirement officials also plan to give employees the option of allowing the state to manage their defined contribution savings (Bachus, 2014). The legacy defined benefit plan has a 1.575 percent multiplier and a normal retirement age of 60 and employees have the option to contribute to a supplemental defined contribution plan. Most workers in the legacy plan participate in the optional defined contribution plan and have contributed 3.5 percent of salary average.
In the Tennessee hybrid system, the defined benefits (DB) are reduced and the defined contributions (DC) are increased. This improves cost predictability in several ways. Scaling back the DB portion reduces the state’s exposure to the cost uncertainty associated with plan assumptions of DB plans. The employer’s contribution to the DB is set at 4 percent payroll, which is currently estimated to exceed the employer’s expected cost by 1.5 percent of payroll. This extra funding will be saved as a reserve to provide a cushion in leaner years. Also, an additional cost control allows the plan to adjust COLAs and employee contribution levels when rates of return fall below expectations (The Pew Charitable Trusts, 2015, pg. 4). Again, the hybrid plan improves retirement security for many Tennessee workers. Most employees who start at age 27 are expected to leave state employment by their early 40’s so the hybrid plan is likely to provide better retirement security for many workers while still offering a substantial replacement rate for career workers (15). A career employee, starting work at age 27 and retiring at 65 can expect to receive replacement income of approximately 56 percent from the legacy plan (Terry Group, 2013).
However, simply shifting from just a defined benefit (DB) to a defined contribution (DC) is not a good approach. As reported in the April 2011 paper, A Role for Defined Contribution Plans in Public Sector, the Center for Retirement Research discusses the negatives of proposed solution one, moving government workers from purely a defined benefit plan to a defined contribution system.
Specifically, switching to a defined contribution plan would require employers to obtain disability and survivor benefits as well as retirement income from another source at likely a higher cost. DC would require each individual to bear mortality and other risks alone, consequently requiring higher contributions than if the risks were pooled.
DC would also limit the ability of state and local governments to attract and retain qualified employees, possibly intensifying labor shortages in key service areas by increasing employee turnover rates. DC would likely result in lower and less secure retirement benefits for many long term governmental employees including firefighters, police officers and teachers who make up more than half of the state and local government workforce (U.S. Census Bureau, 2010, table 450). State and local employees who are without Social Security coverage would be subject to even greater risk. DC could negatively impact state and local economies, since a large number of retirees would likely receive lower retirement benefits and therefore have less disposable spending income to purchase goods and services in the communities in which they live.
DC would likely lower investment earnings and increase investment management costs to the detriment of the plan participants. DC would prevent state and local governments from offsetting employer contributions with investment earnings which on average have funded more than two thirds of public retirement benefits over the past 25 years. Finally, DC would likely result in pressure on state and local governments to augment DC plan benefits and require increased financial assistance for retirees (National Conference on Public Employee Retirement Systems, 2011, pg. 2).
With this proposed best approach to minimizing the Ohio pension crisis, there are risks and tradeoffs involved as discussed above. According to Bickers and Williams (Bickers & Williams, 2001, pg.69), by using the Prisoner’s Dilemma theory, we can see the outcomes from two or more actions taken by state policy makers. Collective action problems result from the fact that outcomes are determined by all individuals in society. One person, through individual actions cannot determine outcomes. But state policy makers also have to consider one of the key implications of gains from trade which is resource transference to a higher valued use, as stated by Harold Winter. The objective is to move a resource, in this case pension plans, to a higher valued use, but value is a subjective concept, thus the reason for so many solutions to the pension crisis. The concept of subjective value is central to economic reasoning, yet to the noneconomist it is sometimes poorly appreciated (Winter, 2013, pg. 22). Therefore, when it comes to saving for retirement, the risks in the investment return of a pension fund have been a challenge for both employers and employees. The shortcomings of the two typical pension structures are well known as mentioned above. A defined benefit (DB) plan ensures the promised retirement benefit to employees, while shifting all the risks to plan sponsors. By predetermining the contribution rates required, a defined contribution (DC) plan leaves the participants to worry about the value of the accumulated savings at the time of retirement. Both plans have their disadvantages and attempts to share the risk among both the plan sponsors and employees have been around for a while.
Conclusion
The problem of unfunded state and local pension plan liabilities is large and growing in scope. The public pension problem manifests itself in hundreds of cases across the United States, in all 50 states and in several municipalities. Total unfunded public pension liabilities are estimated at sizes ranging from a conservative $730 billion (Wilshire, 2012, pg. 3) to an enormous $4.4 trillion (Novy-Marx & Rauh, 2009, pg. 198) and some analysts estimate that they have grown by a magnitude of six over the past decade (Wilshire, 2012, pg. 3).
Ohio’s five defined benefit public pension systems are broken. What began as a method of providing good retirement benefits for public employees has evolved into a fiscal nightmare of red ink, runaway liabilities and for many government workers, pension packages well north of millions of dollars. Meaningful, comprehensive public pension reform is just one step in bringing prosperity back to Ohio. I believe with a well-designed hybrid pension plan, employees would be on the path to a secure retirement as well as providing a greater cost certainty for the plan sponsors.
The pension crisis does not bode well for the American public. As stated by Van Horn, “A permanent job with good benefits is beyond reach for most American workers. Perhaps only federal judges and tenured professors are insulated from the forces of workforce transformation and even they face new challenges to their now rare, privileged status” (Van Horn, 2013, pg. 49). Due to our changing economy, state pension reform is essential in restoring sustainability and fairness to these systems, as well as the United States economy as a whole.
References
Schwiebert, A. (2011, pg. 1,5,12,14,16,18,19). Hanging by a Thread” Big Payouts and Promises Leave Ohio Pension Plans on the Brink of Collapse or a Massive Bailout”. The Buckeye Institute. Retrieved November 1, 2015, from http://www.buckeyeinstitute.org/uploads/files/Hanging%20by%20a%20Thread.pdf
The Pew Charitable Trusts. (2015). Pew Analysis Shows $968 Billion State Public Pension Funding Gap in FY 2013. Retrieved November 20, 2015, from http://www.pewtrusts.org/en/about/news-room/press-releases/2015/07/14/pew-analysis-shows-968-billion-state-public-pension-funding-gap-in-fy-2013
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Jill Bachus, Tennessee Consolidated Retirement System director, pers. comm., Dec. 10, 2014.
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Analysis by the Terry Group based on 2013 Tennessee Consolidated Retirement System actuarial valuation.
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