In June, the Thomas B. Fordham Institute released a study of Ohio's teacher pension system entitled Golden Peaks and Perilous Cliffs: Rethinking Ohio's Teacher Pension System (see here). In the report's introduction the institute's president, Chester E. Finn, Jr., and I wrote, "We hope this report triggers a long-overdue discussion about the state's teacher retirement system, its challenges, and ways it can be improved for the benefit of current members, future teachers, and state taxpayers."
The discussion we sparked has been far less civil than we expected. Instead of debating how to modernize and improve the State Teachers Retirement System of Ohio (STRS), STRS and its supporters, most recently State Senator Sue Morano in the Columbus Dispatch, have attacked the authors of the report-two of the country's premier school-finance economists-and the Fordham Institute (see here).
Golden Peaks and Perilous Cliffs identified four major shortcomings in Ohio's existing "defined-benefit" teacher pension system:
- It's expensive. At the time the report was written, as noted by Senator Morano, STRS was projecting $19 billion in unfunded liabilities for pensions. This number fluctuates with the stock market but this is a significant debt on the future. Second, the debt is even greater when one adds the estimated $9.8 billion-STRS's figure-in health care costs to its obligations. It is to meet these costs that H.B. 315 has been proposed in the Ohio General Assembly to require teachers and schools districts each to contribute 2.5 percent more to the system within five years. Money for these costs will have to come out of the budgets of hard-pressed local school districts (funded by taxpayers) and the paychecks of hard-pressed teachers.
- It encourages early retirement. STRS provides highly subsidized health-care premiums for retired teachers until Medicare kicks in at 65, and the system encourages teachers to retire at 55 or 60 when the average American is working to 65 or 67. Can Ohio really afford to have teachers retire at 55 when the Social Security retirement age is rising to 67? As the Pew Charitable Trusts warned in its December 2007 report Promises with a Price, "a growing gap between public and private sector benefits will fuel political debate as taxpayers notice that they are contributing to government employee retirement benefits that are increasingly unavailable to taxpayers at large."
- It's a disincentive for young teachers and hinders teacher mobility. Young teachers who move from Ohio's pension system to another teaching or non-teaching job suffer serious losses in pension wealth. Teachers with 10 or more years of seniority suffer very large losses if they move into another line of work or to another state. Additionally, Ohio's high payroll-contribution rate (10 percent now, but 12.5 percent if H.B. 315 becomes law) may hinder recruitment of new teachers.
- It is rife with ad hoc fixes. Because the system now encourages early retirement, Ohio has responded by adding ad hoc incentives for continued employment, making the system even more costly. Today, it permits teachers to collect pensions while continuing to work fulltime as teachers (known as "double dipping") at a time when the assets of the system fall far short of accumulated pension and health-insurance liabilities.
At no time has the Fordham Institute or the authors of the report suggested that promises made to current teachers should be broken. What the authors said in the report, and what we have said subsequently in response to various criticisms, is that STRS has serious problems that won't go away without fundamental changes to the system. The time for discussing these changes is now. Declaring all is well, as STRS and its supporters persist in doing, while seeking a five percent increase in spending on the system should raise serious red flags for taxpayers and lawmakers alike. This isn't about ideology but about what Ohio can afford.
