Sunday, June 8, 2008

Defining Retirement

When are you going to retire?
I grew up in Charleston WV, a region that was once to the chemical industry what Pittsburgh used to be to the steel industry. With few exceptions, the men in my neighborhood worked for DuPont, Union Carbide, Dow Chemical, FMC or Monsanto. Most of these operations had a union labor force, and for two generations, the management and workers alike enjoyed tremendous benefits, both while working and in retirement. My grandfather retired from DuPont in 1963 at age 63, after more than 30 years service. He and my grandmother lived well into their 90s, and ultimately he spent more years as a pensioner than as an employee. My Dad also retired from DuPont, but at a younger age due to medical reasons. Dad lived to age 83, all the while enjoying a pension and medical insurance that covered many hundreds of thousands of dollars in medical expenses.
Not quite the kind of deal offered to most private sector workers of my generation, or the generations to follow. American industry came under all kinds of economic pressure, and one response was ending the practice of offering defined-benefit pension plans – where the size of the monthly pension check is known in advance and guaranteed by the trust fund that the company manages on the employees' behalf.
The next stage of evolution became the defined-contribution plan where the employer agrees to put a certain amount of money into the trust fund to be invested and grow, and is generally paid it out in a lump-sum at the employee's retirement. From there, it was up to the retiree to make it last.
Even defined-contribution plans seem to be disappearing in the private sector. While many employers offer 401(k) plans and may even match some percentage of the employee's contribution, to a great extent, today's worker are on their own to fund retirement. Not the least of the retiree's concern is how their health care costs will be covered.
In the public sector, defined-benefit pension plans are still the norm. Public school teachers in Ohio join the State Teachers Retirement System (STRS). From the STRS website: "STRS Ohio operates under the guidelines of Chapter 3307 of the Ohio Revised Code as enacted by the Ohio General Assembly. It is legally separate from and fiscally independent of state and local governments."
It turns out that it's not really that independent. There is a bill, HB315, working its way through the General Assembly which, if passed, would increase by law teacher contributions to STRS by 2.5% of their salary, and likewise require the school districts to increase their contributions by 2.5%. This is because the STRS management has projected that their health care fund will run out of money by 2021.
The Ohio Education Association (the state teachers' union) endorses HB315, and is encouraging teachers to write letters in support to legislators (with a sample provided). The closing line of the model letter is "As an active teacher, I would rather pay a manageable amount towards my future health care benefits while I'm working than be saddled with the full cost of health care in retirement. Please support HB 315 to help provide access to affordable health care for Ohio's current and future retired teachers."
Interestingly, the Ohio School Boards Association opposes HB315, and has created an 'opposition toolkit' which can be downloaded. Their press release states: "STRS has $77 billion dollars in assets and wants more to fund healthcare for retired teachers. We want our teachers to receive a fair retirement. By law, STRS must provide a defined retirement benefit that is very generous. How many Ohioans have the opportunity to retire at age 50 with full benefits and get annual increases?"
For the 85% of the STRS members who are in their defined-benefit retirement plan, the retirement schedule is:
  1. At any age after 30 years of service and receive 66% of the average final salary for life;
  2. At any age after 35 years and receive 88%
  3. At any age after 40 years and receive 100%
  4. At age 55 after 25 years of service and receive 55%
  5. At age 60 after 5 years of service
  6. Early retirement is available as early as age 50 with full benefits
On top of that the defined-benefit plan provides for 3% annual 'cost-of-living' increases.
To put this in real numbers, a Hilliard teacher with a Masters degree + 15 additional hours and 30 years of service who retired in June 2008 would have a final average salary of $83,935 (one reason to get the new contract settled before the end of the school year). That would make the retirement benefit $73,863, increasing by $2,216 every year. Note that it is quite possible for a teacher to complete 30 years of service while still in his/her young 50s.
I won't argue that 30 years of teaching isn't hard work. But those of us in private sector work pretty hard too. And it looks like for many of us, there will be no retirement – not at 55, or 65, or even 75. You have a good deal –
– a very good deal.


  1. Part of the problem is that STRS provides powerful incentives that affect retirement behavior, and these incentives work at cross purposes with those incentives put in place by local school districts. It is a very bizarre system. You can read more about it in the Fordham report here

  2. Paul, again, some great digging out of more costs coming to our tax bills. I was fully aware of STRS
    system and the very positive benefits
    Now with the potential of this bill passing, our tax bills will rise again significantly.

    Somehow there has to be some adjustments made. The questions is how are questions will be received by the district and HEA

  3. Thank!

    Here is the link to the actual Fordham report.


  4. Paul, Out of curiosity, what are the "full benefits"? Just healthcare (for retiree and family) and income with built in increases? Is there more?

    I appreciate so much the information that is being shared on this blog. Thank you for your effort.

  5. Not sure exactly what "full benefits" means, but will reread the STRS documentation to see if I can find the answer. That verbage came from the Ohio School Boards Association, not STRS.

    Thanks for the question.


  6. In order to answer the question above about "full benefits," I was reading the chapter of the Ohio Revised Code dealing with the STRS, and came across some other nuggets of interest...

    3307.30: "Employers who obtain funds directly by taxation shall levy annually such additional taxes as are required to provide the additional funds necessary to meet the financial requirements imposed upon them by this chapter, and said tax shall be placed before and in preference to all other items except for sinking fund or interest purposes."

    In other words, if the actuaries say more contribution by the school district is required to keep the trust fund solvent, our School Board is required by law to make that contribution, even if it means raising our property taxes. So what happens if the voters don't pass a levy which might be needed to raise this additional money? We have to pay it anyway - before any other expenses.

    3307.31: Oh, and here's how 3307.30 is enforced - the State deducts the School District's share of the STRS contribution from the State Aid dollars before we ever see them.

    3307.39: STRS does not have to offer health insurance to retirees, but if it chooses to do so, it may either buy insurance from a private or public insurance entity, or may be self-insured. At present, STRS does choose to offer insurance and to be self-insured.

    3307.61: However, at age 65, STRS must offer hospital care benefits to retirees which are equivalent to those provided by Medicare (since teachers pay into neither Social Security nor FICA while employed). The premium for this coverage will be paid half by the teacher, and half by the school district.

    ... so it seems that the primary retirement benefits are the pension and optionally, health coverage (which is optional only until age 65 as noted above). There are also various provisions for payout to beneficiaries upon the death of the retiree.

    Hope this helps.


  7. Are the taxpayers aware that in addition to paying the hefty salaries of district administrators, the public is also footing the bill for the administrators' retirement funds, of which the administrators themselves contribute zero dollars?