The Ohio Public Employees Retirement System may look to slash future benefits to overcome the largest unfunded liability that the system has ever faced.
OPERS is the largest public pension system in the state.
About 78 percent of OPERS’s liabilities are funded, which means that the pension system is underfunded by 22 percent, which amounts to $24 billion. Unless OPERS scales back its unfunded liabilities, it could have trouble paying out all of the benefits it is required to pay by law.
To help overcome this liability, the OPERS board voted to freeze the cost-of-living adjustment for 2022 and 2023. This will need to be approved by the state legislature to go into effect. After those two years, the adjustment would go back to current levels. Without the freeze, it would take OPERS about 27 years to pay off its unfunded liabilities, but this freeze cuts that back to 21 years. According to Ohio law, if it would take a pension system more than 30 years to pay off unfunded liabilities, then it would have to submit a plan to the legislature detailing how it will reduce the liability below that number of years. This freeze would prevent that from occurring.
Some of the other changes that OPERS is considering include raising the retirement age and cutting benefits for employees who are hired after 2022. This would also need legislative approval.
Michael Pramik, a spokesperson for OPERS, said that having unfunded liabilities is common and that a pension system that’s 80 percent funded is seen as good in pension circles. However, he said that with the largest unfunded liability and an uncertain investment outcome over the next 10-15 years, OPERS’s actuaries told system officials that they needed to reduce the unfunded liability.
Greg Lawson, a research fellow for The Buckeye Institute, said the proposed changes would be effective ways for OPERS to save money. The Buckeye Institute is an Ohio-based, free-market think tank.
Although cutting benefits is not popular, Lawson said that the pension system has been struggling and that this solution was expected eventually. For a long-term solution, The Buckeye Institute has encouraged gradually shifting from a defined-benefit system to a defined-contribution system, similar to a 401(k) plan.
“Such a solution would eventually eliminate unfunded liabilities from the state perspective and avoid any potential for a possible future taxpayer bailout,” Lawson said. “Further, public employees who go in and out of public service or those who do not plan to spend a full career working a public job are losers under the current system anyway. Their guaranteed pensions are much smaller than those who spend their entire career in a public job. A 401(k)-like plan that is portable between public and private employment will give them far more flexibility to take the kind of jobs they want rather than being compelled to stay in a job they may not like in order to get a ‘full pension.’ ”