Ohio Workers' Retirement Money Is at Risk

Pensions may not seem like a priority in this year's Ohio legislative session after 2012’s reforms. But it’s time to look again. While helpful, those improvements aren’t likely to stop a future funding crisis. According to our new research, the chance of Ohio’s pensions being above water 20 years from now is less than that of a coin flip.

Ohio’s public pension system is composed of five plans with a combined 652,896 active members and 453,972 beneficiaries: The Ohio Public Employees Retirement System (OPERS), Ohio School Employees Retirement System (SERS), Ohio State Teachers Retirement System (STRS), Ohio Police and Fire Pension Fund (OP&F), and the State Highway Patrol system.

Each is safe for a decade – but after that, things get dicey. There is only a 50 percent chance that OPERS – the largest – will have enough to pay retirees by 2037. OP&F is in even worse shape, with less than a 25 percent chance. STRS and SERS fall somewhere in between.

It’s important to note that state and local government workers in Ohio don’t participate in Social Security. And unlike in some states, public pensions in Ohio aren’t specifically protected by the state Constitution. Thus many of Ohio’s public-sector workers depend on their pension for a dignified retirement, making public pension reform especially important.

The coming crisis is easy to miss. On paper, Ohio’s pension plans range between 67 and 84 percent funded. But even if you are comfortable with less than 100 percent – the traditional goal – the plans are in far worse shape than the numbers suggest.

These simple “funding ratios” rely on assumptions that aren’t so simple. How many retirees will need to be paid? How long will they live? What will their wages be? And – importantly – how much will each pension’s funds earn on the investment market? Actuaries typically do a good job with these projections, but they are only projections.

Projecting the investment returns – which account for 70 percent of a plan’s funding – is an especially difficult task. It tells us how much to save today in order to generate enough money to pay retirees 10, 20, or 50 years from now.

Administrators assume Ohio’s funds will earn between 7.75 and 8.25 percent annually. Yet over the past 10 years OPERS, STRS, SERS and OP&F all fell short, with average returns of between 6.6 percent and 7.3 percent. As many states learned during the Great Recession, when these types of discrepancies aren’t addressed, they can result in billions in funding shortfalls.

Not only do the investment returns fall short, but they can be volatile: Single-year returns have ranged from a 21 percent loss to a 20 percent gain.

OPERS’ investments lost $22.8 billion in 2008 and made $15.8 billion in 2009 – a swing of $38.6 billion. Making safer, less volatile investments reduces the risk, though it brings lower average returns and requires that more money be put into the system.

Ohio’s five plans may be underfunded by as much as $289 billion. Even if they were “fully funded,” there would still be less than a 50/50 chance their investments would perform well enough to make every payment due to retirees.

Of course there’s always a chance – unlikely as it is – that the plans earn more than expected.

Many of the available fixes are either short-sighted or painful. The “pay as you go” route pays current retirees with money meant to fund future benefits. Further increasing state pension contributions means higher taxes, cuts to public services or both.

Increasing employee contributions or cutting benefits takes money out of workers’ pockets.

The compromise approach, on the other hand, seems to be helping in states like Michigan and Kentucky. It’s not a silver bullet, but marginally increasing contributions, changing benefit formulas, and adopting elements of 401(k)-style plans helps get things under control.

Ultimately, it’s a choice between making relatively small changes soon, or taking the path of Illinois and leaving only the most painful options on the table.