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Senate Bill 5 Makes Retirement Funds Worse
If SB 5 passes, we are all under the general assumption that salaries will take a hit, and many public union employees will contribute more toward their health insurance and pensions. Even without a reduction in salary, everyone is expecting a reduction in take-home pay. For me, the marginal increase in health insurance represents a decrease in my take-home pay of 1%. Multiply this amount across all of the affected employees and you have a significant loss of dollars going back into our local economies. Now, if we all expect to experience a reduction in salary, even of only 3%, my take home pay is decreased by 4.2%. Numerically, this represents a drop from $1,500 to $1,437 every two weeks (26 pays). A yearly loss of $1,638 in take-home pay per employee. A 10% reduction in salary would result in a drop from $1,500 to $1,325 every two weeks (26 pays), or a yearly loss of $4,550. These drops in salary would result in corresponding decreases in income tax revenue and sales tax revenue as we all cut back on spending. The effect on the retirement systems is a bit more complex and more intriguing. Much has been made of the dwindling money in the various retirement funds, and SB 5 is seeking to correct that by restricting employer contributions. For teachers, House Bill 69 is seeking to enact changes to the State Teachers Retirement System (STRS) by increasing employee contributions. These mechanisms are intended to increase the flow of money into the funds to make them sustainable. So, what happens if the flow of money doesn't actually increase, but actually decreases due to the convergence of these factors? What if the pay decreases and elimination of employer contributions offsets the increased percentage of employee contributions? With the proposed changes to STRS through House Bill 69, it is a likely scenario that many teachers will consider retiring earlier than planned. Without getting too complicated, the system is being adjusted to reduce retirement benefits, with changes rolling in starting in August 2012. Benefits are also calculated based on the five highest years of earnings (instead of highest 3 years). This altered calculation could cause many teachers to retire early, especially if SB 5 has a significant negative affect on salary that offsets the retirement benefit gained by staying. While the overall salary cuts would reduce the STRS obligation long-term, they would also decrease the STRS contributions in the short term. Potentially more damaging to the fund is the impact of massive retirements. If STRS suddenly has to take on a significantly large portion of early retirees, combined with the loss of the contribution of those retirees, the burden on the fund is increased. The only offset to those funds is the hiring of a teacher to replace that retiree. The fund also loses the financial contributions from the retiree and school district ($18,900 per year for $70,000 salary) and has them replaced by financial contributions from the new hire and school district ($8,100 per year for $30,000 salary). [Salary amounts for illustration purposes only]
And to follow from before, a 3% cut is salaries also means a corresponding 3% overall drop in STRS contributions (employers and employees contribute a percentage of salary). These combined reductions in contributions could be expected to more than counteract House Bill 69's increase of 3% in teacher contributions rolled in over the next three years. For emphasis on this point -- teachers will be reducing take-home pay 1% per year over the next three years as they increase STRS contributions. This 3% reduction in take-home pay was not calculated earlier, so let's add that in to our overall salary calculation. [For those keeping track, this 3% change will drop take-home pay from $1,500 to $1,277 every two weeks (26 pays), or a yearly loss of $5,798] The change in contributions are substantial: A $70,000 salary will equate to an STRS contribution of $18,900 (post HB69) A $30,000 salary will equate to an STRS contribution of $8,100 (post HB69) This means that for every teacher that retires early because of the combined effects of HB69 and SB5, the retirement system, one of the reasons that is supposedly driving these changes, will likely experience a loss of over $10,000 in annual contributions. We'll be right back here in 8-10 years (if not sooner) discussing our need to reform our retirement systems once again. Other state pension plans can expect to experience similar effects. Finally, remember that those employer savings are not intended to be used to hire additional workers, they are intended to help reduce Ohio's budget deficit. This isn't a "jobs" bill.