SEIU District 1199 and other labor organizations representing public employees in the State of Ohio were contacted by members of the Ohio press corps seeking insight and information about our state's public employee pension programs.
In response to that inquiry, Service Employees International Union District 1199, AFSCME Ohio Council 8, OCSEA AFSCME Local 11, Ohio Education Association, and the Ohio Federation of Teachers issued the following joint response.
Q1: Specifically, our project will attempt to answer whether public employee defined-benefit plans, as currently constituted or in any form, are sustainable over the long term.
A: Let us first point out that Ohio's public employees, who are also taxpayers, do not receive Social Security benefits unlike private sector workers. The average pension benefit for a public employee in Ohio is a modest $23,535 a year. Read more: http://www.nirsonline.org/storage/nirs/documents/factsheet_OH.pdf
Yes. Ohio's pension plans are sustainable. They either currently meet their statutorily required 30 year amortization period or have recently developed readjustments to their plan designs to get there. Such reviews and readjustments to the plan designs occur constantly. Defined Benefit public sector retirement plans continue to demonstrate that not only are they sustainable over time, but they truly provide more bang for taxpayers' pension buck in terms of overall costs. According to the National Institute on Retirement Security, defined benefit plans cost employers nearly 50% less than defined contribution plans. Read more: http://www.nirsonline.org/storage/nirs/documents/Bang%20for%20the%20Buck%20Fact%20Sheet.pdf
A DB plan provides benefits more efficiently, better fuels our economy and provides true retirement security. The DB is more fiscally responsible. And let's be clear, DC 401k plans were always intended to merely supplement a pension, not replace it. They were not designed to provide a full retirement and relying on them to do so wreaks havoc with any attempt to allow for a secure retirement and a natural progression of retiring older workers to make room for young people entering the job market.
The switch to DC plans in the private sector was never about ensuring retirement security - it was about shifting risk and costs to employees and off the books of corporations. This is why many Americans who have only DC plans are neither ready for retirement nor able to retire. Americans who have only a DC plan are at huge risk of outliving their assets. Adding public workers to this mix is the wrong answer for everyone including taxpayers.
Q2: As you probably know, the Ohio Police and Fire Retirement Plan and State Teachers Retirement Plan are requesting increases in employer contributions to help keep up with rising health-care costs, the wave of baby boom retirements and downward trends in investment performance.
A: Each of the systems is designed to take into account when people will retire and the stresses of their type of job; this is built into the mechanics of the plan. Each of the systems has been engaged in long term strategic planning to not only look at the impact of the baby boomers, but other factors as well. For STRS the employer contributions are the same today as they were 25 years ago. Unfortunately, even when employees want to increase their contribution to the plan, they must obtain legislative changes to allow for that.
All classes of investors suffered during the market decline of 2008-the largest downturn in 70 years. The long-term strategy and design of our retirement systems smoothes gains and losses over a longer period of time, so DB plans are better able to reduce volatility. The same cannot be said of DC plans.
Q3: Pension costs are becoming a larger share of municipal/school district payroll costs.
A: The cost of the pension systems to employers has remained relatively unchanged for years at the statutorily required amounts. Pension costs are really part of a total compensation package worked out between employers and their employees.
Additionally, for every dollar paid to a retired public employee, taxpayers contributed about a quarter. Because these are large systems, two-thirds of the benefits come from investment returns-the rest comes from employee contributions.
Expenditures made by state and local government retirees provide a steady economic stimulus to Ohio communities and the state economy. In 2006, 357,234 residents of Ohio received a total of $8.41 billion in pension benefits from state and local pension plans, with $8.29 billion paid from plans within the state and the remainder originating from plans in other states. These dollars are vital to fuel Ohio's economic engine. Read more: http://www.nirsonline.org/storage/nirs/documents/factsheet_OH.pdf
According to a study by the National Institute on Retirement Security, every dollar paid to a retiree in benefits, returns $1.33 to the Ohio economy as those retirees (roughly 90% of whom live in Ohio) spend that money in our communities. This helps fuel the economy of cities and school districts and increases revenue to all political subdivisions. Read more: http://www.nirsonline.org/storage/nirs/documents/factsheet_OH.pdf
The National Institute on Retirement Security research shows that the Ohio public pension systems create 79,410 jobs in Ohio from the spending of these retirees. If you take these jobs away who will pay the taxes to fund schools, cities, towns and the state? Read more: http://www.nirsonline.org/storage/nirs/documents/factsheet_OH.pdf
Q4: In the case of employers, have pension costs become a significant burden?
Would the increases in employer rates proposed by OP&F and STRS harm the ability to deliver services to citizens/schoolchildren? Are there any examples of cities/school districts that have had to make significant cuts as a result of growing retirement costs?
A: Unlike other states, by statute pension obligations are very predictable for Ohio's public employers as the code prescribes employer and employee contribution. Public employers save 6.2% of payroll annually - since public employees do not receive Social Security benefits, public employers do no pay into Social Security like private sector employers do. That requires that the state provide a retirement benefit that provides both retirement income and a safety net similar to what private sector workers receive from Social Security.
The employer's contribution to the systems has remained fairly constant over the years. So there has been no additional cost. We are not aware of any political subdivisions making cuts due to retirement costs.
We are, however, aware that private sector employers who have reneged on the retirement commitment to their employees have caused those employees to use public services more. This drives up costs for taxpayers as it shifts the burden from the private sector employer to the taxpayer who funds safety net programs like food, heat and housing assistance. According to a NIRS study, DB pension plans created a national public assistance expenditure savings of $7.3 billion, as American's seniors with a DB plan are far less likely to rely on safety net programs. Read more: http://www.nirsonline.org/index.php?option=com_content&task=view&id=285&Itemid=48
In addition to reduced reliance on public assistance programs by DB pension retirees, the public pension systems fuel the local economy through investments and retiree spending. This has bolstered the economy in Ohio cities, counties and school districts. In turn, this helps provide revenue for all political subdivisions. There are close to 400,000 Ohio public sector retirees, 90% of whom live in Ohio. Their purchasing power goes a long way to support our economy. Read more: http://www.nirsonline.org/storage/nirs/documents/factsheet_OH.pdf
Q5: Are you concerned that over the long term, defined benefit plans in the public sector might become as (apparently) burdensome as they have in the private sector, which has largely shifted to 401k and other defined contribution plans?
A: To quote Time magazine in its October 9, 2009 cover story "Why it's Time to Retire the 401k"
"Invented nearly 30 years ago as an executive perk -- one more way to dodge Uncle Sam -- the 401(k) was never meant to replace the employer-guaranteed pension fund, supplemented by Social Security, as the cornerstone of our nation's retirement system. But propelled by a combination of companies looking to cut costs and consumers who wanted control of their retirement destiny, that's exactly what happened. The ugly truth, though, is that the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves."
Read more: http://www.time.com/time/business/article/0,8599,1929119,00.html#ixzz0XoOoLQLA
Unlike other states, the Ohio General Assembly has made sure that public employers and employees contribute regularly to the plans for the last 75-90 years. Because of our shared responsibility, we are not suffering from underfunding. The rules governing DBs in the public sector and in the private sector are completely different and the "burden" associated with DBs in the private sector is a relatively recent regulatory creation. Over the last 30 years the federal government through regulation has propped up the 401k and similar savings vehicles at the expense of defined benefit plans that provided real retirement security to our parents and grandparents.
Public sector DBs are primarily regulated by the states and can be modified to ensure sustainability over time as well as adequacy of benefits. We are committed to undertaking necessary reforms to ensure the sustainability of our retirement plans and the adequacy of retirement income. The price for DB plans is certainly more attractive than paying into Social Security plus a 401k style plan combined with the increased reliance on public assistance that DC plans create.
Q6: In the case of employee groups, how important is it to keep pensions as opposed to following the private sector's lead into defined contribution plans? What are the best arguments for the status quo?
A: It is vital to Ohio's economy that DB plans continue. To accommodate the necessary turnover of older workers to make room for new folks entering the job market, it is vital that DB plans continue. To prevent increased reliance on public assistance programs, it is vital that DB plans continue. To allow public employers to recruit and retain workers with this benefit, it is vital that that DB plans continue. There is simply no compelling reason why the public sector should compete in this shameful race to the bottom that the private sector has embraced - to do so will cost taxpayers more in the long run.
Expenditures made by state and local government retirees provide a steady economic stimulus to Ohio communities and the state economy. In 2006, 357,234 residents of Ohio received a total of $8.41 billion in pension benefits from state and local pension plans, with $8.29 billion paid from plans within the state and the remainder originating from plans in other states. These dollars are vital to fuel Ohio's economic engine. Read more: http://www.nirsonline.org/storage/nirs/documents/factsheet_OH.pdf
Public DB plans are cheaper and more efficient. Unlike private corporations, states and local governments can't escape their obligations. Public employees who lack adequate retirement security will seek income, food and housing assistance which costs the state and local governments they retired from. DB plans are an investment in the long term economic health of our state and of our families. Private sector individual accounts are inadequate - they do not provide adequate retirement income for most participants and will require far more government support in the future for individuals who will outlive their accounts or be unable to eke out significant income from their meager savings.
Q7: Do you foresee a gradual erosion in benefits (higher retirement ages, reduced health coverage) even if the defined benefit plans are preserved?
A: Plan sustainability and adequacy of benefits are our top priorities. Achieving these goals will require shared responsibility. Our members have always contributed to their retirement and will continue to do so. We are committed to making necessary changes going forward that ensure adequacy of retirement income and the sustainability of our retirement systems given such things like increased length of life and rising health care costs. And in fact many of the systems have already addressed retirement age in their plan design changes that now await legislative action.
Q8: Should the public sector be "special" in maintaining defined benefit plans even as the private sector moves in the opposite direction? Why or why not?
A: The choice by companies to walk away from their obligations to employees by shifting to individual 401k accounts has made workers in the private sector more vulnerable to poverty in old age. Rather than increasing economic viability for retirees, individual accounts have enriched the companies and individuals who manage these accounts, at the expense of the worker trying to save for retirement.
Everyone should have retirement security that provides an adequate income in retirement after a lifetime of productive work-there is nothing "special" about that. There are a number of public sector jobs that we want people to retire from not at 70 or 65 but sooner. Do we really want a 67 year old firefighter carrying people out of a burning building?
The pendulum needs to swing back so that more private sector workers have renewed access to true retirement security not relegating more workers to a less secure future by destroying public plans that provide real benefits at real value and at more reasonable cost.
Many of the jobs performed in the public sector are extremely difficult, present unpleasant working conditions and are dangerous-highway workers continue to have the highest rate of death on the job. By offering a secure pension public employers are able to recruit and retain Ohioans into these jobs. That is good public policy that has served all Ohioans well.
