Public pension funds threaten us all
State Rep. Larry Wolpert, R-Hilliard, is completing his fourth term in the Ohio House and will leave the General Assembly because of term limits. Fearful of what looming public pension fund deficits would mean to future state budgets, he introduced House Bill 645 (see here) requiring that new public employees be enrolled in so-called defined-contribution pension plans, rather than the defined-benefit plans that are dominant now for teachers and school administrators. Wolpert shares his case for this change below. These comments do not necessarily reflect those of the Ohio Education Gadfly and the Thomas B. Fordham Institute, but we think they are important to share with our readers. In fact, we recently issued a report on the State Teachers Retirement System and have commented on this issue in the past (see here).
In the last century at the height of the Industrial Age, it was common for employers to provide workers with pension benefits. Most of these pensions were based on a defined benefit: that is, a specific pension amount was based on years worked and salary earned. Now, in the 21st century, it's becoming apparent that a defined-benefit pension program creates major liabilities for employers (including public-sector employers) and, in many instances, these liabilities cannot be met (see New York City as an example here). To remain competitive and still provide workers with a pension benefit, many private-sector pension plans have been converted to defined-contribution plans-plans in which the retirement benefit is based on contributions made to the pension plan by the employer and the worker. Since benefits are keyed to contributions, these plans are unlikely to have unfunded liabilities.
Around 70 years ago Ohio created a defined-benefit program for all state and local government workers. At the time, Ohioans were relatively well off and earned about 10 percent more than the average American. These government employee plans remain some of the best pension plans in the country-public or private. According to the Ohio Legislative Services Commission, Ohio government employee compensation now exceeds Ohio private-sector employee compensation by six percent, mainly because of the benefit of a defined-benefit pension.
However, Ohio, unfortunately, is not economically as rich as it was. We are, in fact, becoming poorer and grayer. Our economy is stagnant, we have lost hundreds of thousands of manufacturing jobs, and the state is barely maintaining its population level. Even before the current housing bubble burst, Ohio's per capita income was 10 percent below the national average. Out of the 50 states we rank 46th in personal income growth. On average 1.5 percent more people move out of Ohio than move in. Ohioans who remain in the state are becoming older. The only reason we are not seeing population decline is births exceed deaths.
With the crash in the equities and real estate markets, there are even more concerns about preserving the commitments made to Ohio's government workers. If our state pension systems cannot make their financial commitments, ultimately Ohio's already hard-pressed taxpayers must make up the shortfall. State pension benefits are guaranteed under Ohio's constitution and taxpayers are ultimately on the hook for meeting these commitments. Increasingly, Ohio's taxpayers are either retired (often before they want to be) and living on limited fixed incomes, or they're working in lower-paying jobs that have replaced higher-paying industrial jobs. If state pension systems run out of money because they cannot continue to pay these generous government pensions, Ohio taxpayers could easily be stuck with a bill for billions of dollars in pension promises.
I introduced House Bill 645 to short-circuit a looming financial disaster for the state that would be far greater than what we face now. The idea is to protect both the incomes of retired Ohio government workers and Ohio's taxpayers. The bill simply states that any new entrant into a state pension system must be under a defined-contribution plan instead of a defined-benefit plan. The intent of the bill is to reduce any future unfunded liabilities in the pension systems. There is no time in the 127th General Assembly to pass this pension reform bill and I am leaving public service at the end of 2008. But I hope that this bill will be used in the next General Assembly as the basis for reform as financial pressure continues to grow on these generous government benefit programs.
by Larry Wolpert