The Ohio State Teachers’ Retirement System recently voted to give investment staff millions of dollars in new bonuses — an ill-advised decision that retirees and Ohio taxpayers will rightly resent as they struggle to keep pace with record inflation.
Bonus advocates might argue that the pension fund “beat” or “outperformed” its peers. But fund managers still managed to lose $3 billion last year, and “outperformed” is Wall Street jargon that just means other investors did even worse. Neither so-called accomplishment merits a pat on the back, much less a staff bonus.
This most recent STRS vote, however, is merely a symptom of a much graver disease that Ohio policymakers refuse to treat. The state’s public pensions are an untenable relic of the 20th century. They cannot meet the 21st century demands of either the taxpayers that help fund them or the retired workers who rely on them.
As The Buckeye Institute warned more than a decade ago, Ohio’s public pension funds are an ongoing financial liability for hardworking Ohio taxpayers. The funds often create disincentives through their deferred benefit structures and lengthy time-of-service requirements for public employees to leave public employment and take advantage of more rewarding opportunities in the private sector that would help relieve the financial burden on pensions and taxpayers.
Unfortunately, although the Ohio General Assembly temporarily shored-up Ohio’s pensions 10 years ago, policymakers never took the harder steps to account sufficiently for the fact that retiree life expectancies continue to rise. Longer life expectancies are a good thing, of course, but they do affect pension plans by extending defined-benefit pension liabilities, which now outpace what the pension funds collect and can afford to pay over the long run.
The legislative changes were designed to alleviate some of the strain by raising the retirement age for pension eligibility, altering the calculation of benefits and authorizing pension boards to adjust cost-of-living increases (as STRS has done). But these short-term fixes will not permanently close funding gaps as promised benefits exceed current contributions. Ohio taxpayers will be called on to make up the difference as the state’s public pensions hemorrhage cash — an unacceptable “solution” already playing out with calls to increase taxpayer funding for the Ohio Police and Fire Pension Fund.
In addition to these previous legislative adjustments, Ohio should pursue a long-term solution for its public pensions by transitioning from a defined-benefit system to a defined-contribution system.
Although current retirees should continue to receive their pensions under the existing defined benefit structure, Ohio should give future public sector retirees an automatic investment account similar to private sector retirement accounts. Under a defined contribution system, the employer and employee would contribute a specified percentage of the employee’s income to fund future retirement benefits.
Defined contributions should match existing statutory requirements for each pension plan, such as the 14 percent for employers and employees for STRS, but long-term pension costs will stop accruing to taxpayers because the benefits will be paid from the employees’ own account. Additionally, a defined contribution pension system would make pensions more transferable like private sector retirement accounts, so employees can take their retirement contributions and investment earnings with them if they change jobs.
The recent vote to reward STRS pension fund managers with significant bonuses — despite fund losses — highlights the need to reform Ohio’s public pensions to protect taxpayers and retirees from an antiquated, untenable system. Taxpayers should not shoulder the rising, long-term costs of underfunded pensions, and public retirees should not be made to choose between their retirement funds and pursuing career opportunities in the private sector.
Only fundamental changes to Ohio’s pension system will make those corrections, but those overdue changes must be made.
Greg R. Lawson is a research fellow at The Buckeye Institute. His column does not necessarily reflect the opinion of The Lima News editorial board or AIM Media, owner of The Lima News.
