Promises with a Price: Public Sector Retirement Benefits

The Pew Charitable Trusts
December 2007

There has been much written lately, accompanied by serious teeth gnashing, about the sustainability of public-pension systems in the United States (see here and here). This past summer, the Thomas B. Fordham Institute joined the discussion by issuing a report on the health of the State Teachers Retirement System of Ohio (STRS) and its impact on the decision making of current and future teachers about when to retire or, on the other end of the career spectrum, to even get into teaching at all (see here).

The Pew Charitable Trusts has now chimed in with the release of its report "Promises with a Price." This report looks at the bills coming due in the next few decades, $2.73 trillion over the next 30 years, for public employee pensions. For Ohio, there is some good news and some bad news. The good news is that the state's unfunded liability for its public employee pension systems (the state has four) is only $26 billion, which compares well with other states. Illinois's public pension systems, for example, have a cumulative unfunded liability of $41 billion.

However, Gadfly readers will know that the STRS unfunded pension liability is $19.4 billion of the $26 billion facing the state, even though STRS's membership is little more than one-third of the state's three other public pension systems.

According to Pew, public-pension expenses facing the 50 states are staggering, although Ohio has done a comparatively decent job of preparing itself to meet these costs. The really worrying news from Pew relates to the ballooning cost of health-care benefits promised to public employees who retire. Pew estimates the cost in Ohio alone is about $21 billion.

Fordham was able to learn from STRS over the summer that its system expects its health-care cost liability to be about $10 billion. It is these expected health-care costs that have led STRS to recently propose legislation (H.B. 315) that would obligate the system to assume retiree health-care liabilities and to fund these benefits in the same way that STRS now funds the pension liability. Money for these costs will have to come out of the budgets of hard-pressed local school districts (funded by taxpayers) and/or the paychecks of their hard-pressed teachers.

Before locking these costs in as nondiscretionary spending, the General Assembly should consider three observations in the Pew report. First, consider generational equity. Does it make sense to burden future generations with the costs of their parents and grandparents? Second, once granted, a defined benefit is very difficult to take away. Third, 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 (see here). The Pew report is timely and important reading for anyone worried about the future economic health of Ohio. View a copy of the report here.

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