Faculty members at Ohio’s public universities face a decidedly flawed pension plan that deprives many of them of their fair share of retirement benefits. 

When selecting a retirement plan, state faculty may choose between paying into a traditional “defined benefit” plan known as the State Teachers Retirement System (STRS), and paying into an Alternative Retirement Plan (ARP) that works like a typical IRA or 401(k).  Faculty who elect an ARP do not draw from the public STRS pension upon retirement, but neither do they contribute to the STRS during their working years.  And therein lies the problem for Ohio, her taxpayers, and her faculty.

Defined benefit plans like the STRS act in many ways like a typical “pyramid scheme.”  They require a constant influx of new contributors to pay into the system in order to fund the pension payments that must be paid to retirees. By choosing an ARP, faculty deprive the STRS of its life-blood—new contributions from working teachers. 

To offset this potential funding “problem,” faculty who choose to fund an ARP do not receive the university’s full 14% matching contribution that STRS contributors receive.  Instead, ARP contributors only receive a 9.5% employer-match.  The other 4.5% of the employer contribution is diverted from the faculty member’s ARP account into the STRS—effectively requiring ARP contributors to subsidize their colleagues’ pensions.

The 4.5% diversion—or “mitigation rate”—was a tacit recognition of the defined benefit pyramid scheme, and an effort to avoid underfunding the STRS as faculty opt for the ARP.  Pending legislation at the Statehouse would cap the mitigation rate at a slightly lower 4%, but the underlying premise remains fundamentally unsound.

This flawed policy would be unnecessary if Ohio would adopt a “defined contribution” system (DC) for new employees. The Buckeye Institute has long argued in print and before legislative committees against defined benefit systems, preferring DC plans that are more closely modeled on private sector retirement plans. Unfortunately, without a DC system, Ohio faculty will be compelled to subsidize pensions they will never collect, while state administrators perform an accounting gymnastics routine to create the illusion that the STRS—with its mounting unfunded liabilities—remains fiscally healthy.

Until Ohio abandons defined benefit pension plans for new hires, mitigation rates and the dual threats of insolvency and taxpayer bailouts will loom on the fiscal horizon. And those concerns are not merely academic.