Ohioans do not “owe” debts to the Ohio Public Employees Retirement System to pay for the future funding of pensions.
We saw a reference to the contrary in the promotion of a newly published book on the generational effects of public policy. When we encounter such extreme perspectives on pensions and pension funding, we feel the necessity to respond.
The premise of “Disinherited: How Washington is Betraying America’s Young” is that “the American government is robbing millennials (some of whom cannot even vote) to pay for lavish services for their parents and grandparents.” The authors are Diana Furchtgott-Roth and Jared Meyer from the Manhattan Institute in New York, which historically has been identified as having an anti-public employee agenda.
“Along with everyone else in America, you owe $15,052 to cover the total unfunded pension liabilities of state governments ($25,028 if you live in Ohio),” the book states.
Actually, you don’t.
In Ohio, public employers and workers remit the statutorily agreed-upon amounts to their respective retirement systems. For OPERS, that’s 14 percent for most public employers and 10 percent for the majority of our members. They do not pay more or less based on our liabilities at any one time. If adjustments need to be made, the systems make changes to benefits and health care coverage as OPERS did in 2012.
Once payment is made, any unfunded liabilities become ours. They do not belong to all Ohioans. And OPERS’ funding is strong at 84 percent, well above the 80-percent threshold of excellent health. Our amortization period, in which we can pay off those unfunded liabilities, is 24 years. That’s well under the state-mandated boundary of 30 years.
Those facts didn’t influence the book’s authors. For its passages on retirement, “Disinherited” relies on pension funding statistics taken from a report by State Budget Solutions titled, “Promises Made, Promises Broken 2014.”
An assumption that reports like this make is that all of the unfunded liabilities can be due at any one time – thus, taxpayers “owe” the money. This inference is simply untrue. People’s home mortgages aren’t due all at once, and the same is true of the unfunded liabilities of a pension system.
This report ranks the 50 states in terms of funding ratio, unfunded liabilities, unfunded liabilities per capita and unfunded liabilities as a percentage of 2013 gross state product. It aggregates a portion of Ohio’s five pension funds. Without the underlying data, it is hard to determine which systems they have included and which year-end information they have used. But the bottom line is that the report ranks Ohio 48th in unfunded liability per capita.
The State Budget Solutions report is deeply flawed, however. It employs a “free-market rate,” based on the equivalent of 15-year U.S. Treasury bills, to discount liabilities. In 2013 that rate was 2.734 percent. No actuarial organization considers this rate a reasonable basis for discounting pension liabilities. The report assumes pension systems will not earn more than 2.734 percent on investments on a long-term basis. (OPERS has earned an average of more than 8 percent annually for the past 30 years.)
Thus, Ohio retirement systems’ reported actuarial liabilities of approximately $215 billion were more than doubled to a whopping $442 billion. It resulted in $289.6 billion in unfunded liabilities, about five times reported unfunded liabilities of approximately $59 billion.
OPERS operates under a very long time horizon regarding our investments and, to reiterate, contributions are capped by state law.