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Letter to the editor: Why higher employer contributions help STRS

By RUDY FICHTENBAUM

Most retired teachers in Ohio were promised a pension with a regular Cost of Living Adjustment — an inflation adjustment — but, they do not have one. Regular COLAs were eliminated in 2017. Since then, the average purchasing power of an STRS retiree has declined 32 percent. This is why STRS needs an increase in the employer contribution.


A pension is normally set up so that the combined participant and employer contributions plus investment earnings prefund the benefits that participants receive after retirement. Then, a pension’s assets (resources used to pay benefits) equal its liabilities (what the pension owes to current and future retirees). However, when liabilities exceed assets, there is a shortfall: an unfunded liability. Pensions are then required to set up a “payment plan” to pay off any unfunded liability in a specified time. By Ohio law, this time must not exceed 30 years.


Every year, a pension uses a financial expert (actuary) to examine teachers’ earnings, life expectancy, anticipated investment earnings, and other factors to estimate how much money the pension needs to collect (from employees and employers combined) to pay the benefits that teachers earned in a year. That amount is known as “normal cost.” Thus, the normal cost for a given year is the value of the benefits working teachers earned that year.


The actuary then adds the normal cost for a year to the required unfunded liability payment for that year, yielding the contribution needed to pay benefits and pay off the unfunded liability.

In STRS Ohio, employee contributions exceed the normal cost. That is, teachers’ contributions alone pay in full for the benefits they earn; the excess goes toward the unfunded liability. In Ohio, employers pay nothing toward the benefits teachers earn.


That sad situation occurs only in STRS Ohio, not for other public pension funds in Ohio nor for any major public pensions in other states.


For a public pension fund to work properly, there should be a variable employer contribution. In that case, each year, the actuary considers investment returns in determining the employer contribution needed for required unfunded liability payments plus the portion of benefits earned (normal cost) not already paid for by employee contributions.


Ohio is one of only a few states that do not have a variable employer contribution.


Let’s look at some specific numbers for STRS Ohio. For the past 41 years, the employer contribution to STRS has been 14 percent of payroll. But the required unfunded liability payments are more than 14 percent of payroll. That is, the entire employer contribution of 14 percent goes toward required unfunded liability payments; none goes toward the benefits teachers earn (the normal cost).


Today, teacher contributions to STRS are 14 percent of payroll, an amount that has increased by 60 percent over the past 41 years. However, the benefits teachers earn in a year (the normal cost) are just 10.9 percent of payroll, and the remaining 3.1 percent of teachers’ contributions goes toward required unfunded liability payments.


This sad situation — in which employees pay more than the value of their benefits, and employers pay nothing for those benefits — occurs only in STRS Ohio. It occurs neither for other public pension funds in Ohio nor for any major public pension in any other states. Ohio teachers have the worst deal in the country.


But that is not the end of the Ohio story. Teachers’ contributions to STRS have grown by 60 percent over the past 41 years and are now 14 percent of payroll, among the highest in the country. Likewise, the national median employee contribution for non-Social Security states like Ohio, where public employees do not contribute to Social Security, is only 9 percent. However, the employer contribution, fixed at 14 percent for the past 41 years, is one of the lowest in the country. The median employer contribution for non-Social Security public pensions is 30 percent.


Finally, know that STRS pays out about $648 million monthly in benefits but receives only about $313 million in contributions. STRS thus has a negative cash flow, in fact among the worst of any major pension in the United States. This makes STRS especially vulnerable to downturns in investment earnings. The only way STRS can ever hope to pay the COLA it promised members would be to raise the employer contribution.


In today’s information economy, education is the key to Ohio’s future. Attracting and retaining the best and brightest to become teachers is in the interest of every Ohioan. This can only be accomplished if those who choose to become teachers know they can enjoy a dignified retirement. If other states can afford to have their employers pay their fair share of their teachers’ pensions, Ohio can too.


Rudy Fichtenbaum is chairman of the STRS Board and retired as an economics professor at Wright State University.



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