By law, Ohio is a non-Social Security state and has been that way since 1935 when the Ohio Public Employees Retirement System was created. When Social Security was established shortly thereafter, state and local governments were prohibited from joining the system. Public employees here, with few exceptions, do not pay into Social Security, and without OPERS, many of them would not receive a retirement benefit.
A recent federal research report indicates that Ohio ranks first among the states for having the highest percentage of public workers without Social Security-covered employment.
“Social Security: Mandatory Coverage of New State and Local Government Employees,” by the Congressional Research Service, states that 97.5 percent of Ohio’s state and local government workers do not participate in the Social Security system. The state with the next-highest percentage is Massachusetts (95.9 percent). Nationally, 27.5 percent of state and local government employees work in positions not covered by Social Security.
That means that more than 5 million workers depend on public pension plans for their retirement security.
The report also indicates that certain “deficit-reduction groups” have suggested consideration of mandatory Social Security coverage for newly hired state and local government workers. OPERS has historically opposed mandatory coverage because our system is more efficient than Social Security – we provide a secure retirement benefit for our members, and more than 70 percent of our benefits are supported by investment earnings.
An internal analysis proves this point. Let’s consider the retirement benefit of an unmarried man who retires on his 65th birthday with a final average salary of $50,000. We will assume he earned this salary after 30 continuous working years with annual pay increases of 3 percent.
Using the standard OPERS retirement benefit formula (2.2 percent x Final Average Salary x number of years worked), this retiree’s annual benefit would be $32,100, which would provide approximately 66 percent of his final average salary. If the salary and years of service were the same, his Social Security benefit would be approximately $18,000, which replaces only 36 percent of his salary at retirement.
Why do the retirement benefits differ?
One reason is the contribution rates that pay for OPERS retirement and disability benefits: 10 percent from employees based upon their wages, plus 14 percent from employers. The equivalent Social Security contribution is 12.4 percent: 6.2 percent each from workers and employers.
Additional amounts, however, are paid by private employers for 401(k) accounts, matched savings programs and similar contributions that also average approximately 14 percent. (We addressed this topic in a blog on May 10.) The Aon Hewitt study we detailed in the blog shows that employers on average contribute an equal amount for retirement benefits over and above Social Security.
Another important reason for the higher benefit for OPERS members is our investment strategy. The Board of Trustees has developed a comprehensive investment plan that provides diversity to manage risk and encourage long-term stability. The benefit formula also is different between the OPERS pension and Social Security.
If contributions and the formula for calculating a benefit were the same, the OPERS member would be eligible for a benefit of $21,000 compared to the Social Security benefit of $18,000. OPERS can provide the enhanced amount because of our cost-effective model of delivering retirement benefits and investment returns over the long term.
The Congressional Research Service report stresses that having more contributors would extend Social Security’s solvency period. Yet immediate, mandatory coverage of new state and local government employees would extend long-range funding of Social Security by only three years, while eliminating the benefits of better-run and more efficient public pension systems.
Some public sector employers were required to create separate pension plans for their employees when they were excluded from Social Security in the first place. Requiring Social Security coverage would undermine these plans and place unnecessary financial burdens on state and local government employers and employees.
The report notes that mandatory coverage of new state and local public employees would provide a net increase in payroll taxes to the Social Security system. Yet the report adds that “the revenues become available in the Treasury (sic) general fund for other government operations.”
One of the problems with the Social Security system is that its contributions have been used for purposes other than what they were originally intended. That is not the case with OPERS. The contributions that members and employers have made during the course of an employee’s career remain dedicated to retirement benefits and are invested back in Ohio and across the country in businesses that support local communities.
OPERS provides another advantage that Social Security does not: the accumulation of interest earnings on prefunded benefits. OPERS sets aside the actuarially determined benefit of members when they retire. That allows us to earn interest on those amounts as they are paid out to members. Because it’s a “pay as you go” system, Social Security does not provide this advantage.
Also, OPERS members who have paid into Social Security through past private-sector jobs already have their Social Security benefits significantly reduced because of the Windfall Elimination Provision and the Government Pension Offset. Mandatory contributions to Social Security in the future for some of our members might not make up for the benefit cuts that these federal provisions require.
Finally, we have history on our side. OPERS predates Social Security. For more than 75 years, OPERS has successfully provided retirement security to hundreds of thousands of Ohio public employees. With the enactment of the changes to retirement benefits contained in pending pension legislation, we are well-positioned to continue this valuable mission well into the future.