Public pensions in free fall

As the bill to reform Ohio’s five public pension plans crawls through the General Assembly, the need to deal with the unfunded liabilities only gets more urgent.

A study issued this month by The Buckeye Institute for Public Policy Solutions entitled “Hanging By A Thread” places the total unfunded government pension liabilities at $66 billion.

But Ohio isn’t alone in being threatened by this epidemic. An Associated Press survey conducted earlier this year found the 50 states have a combined $690 billion in unfunded liabilities and $418 billion in retiree health-care obligations.

States are taking steps to deal with this mounting problem. New Jersey has raised the normal retirement age from 62 to 65, while California will attempt to follow a similar path through a state ballot issue next year.

Defined-benefit system

At the heart of the problem is the defined-benefit system and retiree health-care coverage that most private sector workers no longer receive.

With taxpayers contributing more toward a public employee’s pension and health insurance than the recipients, the tension between the two groups of workers is at an all-time high.

“With Americans increasingly likely to live well into their ’80s, critics question whether paying lifetime pensions to retirees from age 55 or 60 is financially sustainable,” the wire service reported.

In Ohio, the Buckeye Institute’s study comes to the same conclusions with regard to the five public systems.

“Ohio’s five defined-benefit public-pension systems are broken,” the study states. “What began as a method of providing decent 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 $1,000,000. Ohio’s public employees and taxpayers deserve public-retirement systems that provide fair benefit levels to retirees at reasonable cost to taxpayers. Neither of those two principles is being fulfilled. Gold-plated pension packages and billions in unfunded liabilities is not what Ohioans bargained for.”

So, what should be done to make the systems financially stable?

The Buckeye Institute study says there are two divergent paths Ohio legislators can follow when they deliberate the pension reform legislation. One aims at minor adjustments, such as increasing service-length requirements, retirement age, and Final Average Salary calculations.

The study contends that while such measures will strengthen the pension funds temporarily, they won’t fundamentally change the structure of the defined-benefit system.

The other path is to move toward a defined-contribution-style retirement system.

“Like those found in the private sector, defined-contribution retirement systems place less risk on the backs of the taxpayers while allowing for significant cost savings,” the Buckeye Institute contends. Government workers would have to take on some risk, but under the current system they bear none. Taxpayers are expected to cover the unfunded liabilities.

Defined-contribution plan

New government workers would enroll in a defined-contribution plan in which taxpayers would contribute an amount equal to 10.2 percent of the employee salary. This 10.2 percent contribution reflects an amount equal to the private sector standard of 6.2 percent Social Security contribution and a 4 percent 401k match, the Institute calculates.

The conservative think tank estimates that such a system would save taxpayers $3.3 billion over the next 30 years.

For current public employees, the institute says, access to pensions should match that of Social Security. Pension eligibility should begin at 62 for those with 25 years of service, 65 for those with 15-24, and 67 for those with 1-14.

“This would better reflect life expectancy and establish greater equality with the private sector,” it says.

As for workers under the defined-benefit system, a sliding scale would be implemented. Thus, for those within five years of retirement, the pension formula would be adjusted to reflect a five-year Final Average Salary.

It is clear that the public pension system cannot be sustained without major changes. The question is whether Republican Gov. John Kasich and the GOP-controlled Legislature will to take on this controversial issue.

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