NOTE: The Thomas B. Fordham Institute occasionally publishes guest commentaries on its blogs. The views expressed by guest authors do not necessarily reflect those of Fordham.
This may sound counter-intuitive, but here it is: Technically speaking, Ohio school districts do not contribute toward Ohio teacher pension benefits.
"How is this possible?" you might ask. After all, Ohio school districts are contributing 14 percent of each teacher's salary into the pension fund.
But wait, where is that contribution going? If you pull up the latest actuarial valuation report from the State Teachers Retirement System of Ohio, you can find out. Table I-1 shows that the plan estimates the "normal cost" of the benefits are worth 10.91 percent of salary. That is, across all individuals who enter the plan, after accounting for their age or how long they might stay, the plan thinks the promised pension benefits are worth an average of 10.91 percent of each teacher's salary.
You'll quickly start to screw up your face, especially if you know that every teacher is currently contributing 14 percent of their salary into the plan. Fourteen is more than 10.91 percent, how can that be?
This is due to the fact that Ohio STRS has accumulated unfunded liabilities of $24.8 billion. Every single STRS member is contributing 3.09 percent of their salary (14 percent - 10.91 percent) to pay off that debt.
That's not all. In addition to the employee contributions, school districts are also paying in 14 percent of each teacher's salary into STRS. That money is going into the plan, but none of that is going toward benefits. All of it is going to being used to pay down the unfunded liabilities.
In essence, Ohio has created a system where teachers, on average, are getting less out of their pension plan than they themselves put in. To be honest, it's hard to even call this a "retirement" system at all. The system is functioning like a debt accumulation tool and a tax on teachers, with retirement benefits on the side.
Again, this may be sort of hard to wrap your head around, but it's true. The figures above are all based on what the state's actuaries think the Ohio STRS plan will cost over time. Ohio is the only state in such a bad situation overall, but Illinois teachers hired as of 2011 are also paying more into the system, on average, than the state's pension plan thinks their benefits are worth. Other states may be in similar territory for new, less-generous benefit tiers, but they rarely report those data separately.
In contrast, Ohio also offers new teachers the option to join a defined contribution plan with a 9.53 percent employer match. For the vast majority of teachers, that's likely to be the better option.
This piece was originally published in a slightly different form on the Teacher Pensions Blog.
