Budget & Tax

Experts warn Oklahoma pension changes could harm state finances

October 10, 2024

Ray Carter

After having some of the nation’s worst-funded state pension systems, Oklahoma lawmakers adopted several reforms starting in 2011 that dramatically improved the state’s financial standing. Those reforms included putting all new state government hires into a 401(k)-style “defined-contribution” plan rather than the “defined-benefit” plans that generated so much financial strain.

But in recent years, several efforts have been made to roll back those reforms and shift all state workers again into a defined-benefit plan, based on arguments that the guaranteed retirement income would make state employment more attractive to new workers.

But experts warned lawmakers during a study conducted by the House Banking, Financial Services, and Pensions Committee that reversing course will do little to improve employee recruitment and much to harm funding for a wide range of services, including schools.

“The fiscal health of Oklahoma’s pension system has allowed the state Legislature to fund core government services, appropriate record investment in public education, and increase the state’s savings account to record levels, all while appropriating below their constitutional appropriation authority,” said Bradley Ward, a fiscal analyst who is the deputy state director for Americans for Prosperity–Oklahoma. “The fiscal strength of our pension system significantly reduces the burden on taxpayers by ensuring that pension obligations are adequately funded and managed. A well-funded pension system minimizes the need for taxpayers to cover shortfalls through tax increases or emergency funding.”

Under defined-benefit plans, workers are guaranteed a set amount of retirement income, regardless of their contributions to the system or investment returns. For political reasons, lawmakers often vote to boost those benefits during election years without providing increased funding to offset the added cost.

That practice was common in Oklahoma for many years. Between 2000 and 2010 the unfunded liability of Oklahoma’s state pensions increased from $6 billion to $16 billion. By 2010, actuaries predicted the teachers’ retirement plan would never achieve fully funded status.

In 2010, the Oklahoma Public Employees Retirement System was only 66 percent funded, while the Oklahoma Teachers’ Retirement System was just 47.9 percent funded. Oklahoma’s state pensions ranked among the worst-funded among the 50 states.

To right the state’s fiscal ship, lawmakers enacted several reforms from 2011 to 2014. Among other things, the reforms required legislators to fund any “cost of living” increases in benefit payments.

Lawmakers also created a defined-contribution plan for new state workers starting in November 2015 that is comparable to a 401(k) plan at many private-sector companies. Benefits from those plans vary, based on a worker’s contributions and market returns, but the plans are also portable and remain the worker’s property even if he or she takes a new job elsewhere.

Oklahoma policymakers also increased taxpayer funding to the state pension systems, steadily reducing the unfunded liability.

Oliver Giesecke, a research fellow at the Hoover Institution at Stanford University, said Oklahoma’s state pension systems were 77 percent funded overall in 2022, although individual systems had better funding ratios than others.

Mariana Trujillo, a policy analyst with Reason Foundation’s Pension Integrity Project, noted that the reforms enacted by Oklahoma lawmakers shifted the Oklahoma Public Employees Retirement System from being $1.1 billion underfunded in 2001 to being $75 million overfunded by 2023.

“It made Oklahoma, really, a model for other states, and when I go and discuss reform in other states, I often cite Oklahoma as a success story,” Trujillo said.

If lawmakers reverse course and return to the old system of defined-benefit pension plans for state workers, she warned that dire financial problems could swiftly return.

“This is an incredible accomplishment that should be acknowledged and protected,” Trujillo said. “Any change in the retirement benefit structure could revert or threaten this progress, and this is something that would have a tremendous effect on the fiscal health of this state and, again, the retirement security of your fellow employees.”

Experts also told lawmakers that defined-benefit plans are not a major attraction for most workers in 2024, particularly young workers.

Ward noted a March 2023 state employee compensation study found that “salary has emerged as the forefront factor influencing recruitment and retirement efforts for state employees.” The survey results showed a “clear preference” for higher salaries rather than greater retirement benefits, he said.

That runs counter to arguments made by those advocating for the repeal of Oklahoma’s pension reforms and reverting to the prior system.

“Considering the survey results, it’s evident that state employees believe the current pension system is functioning adequately and does not require changes,” Ward said.

Trujillo noted that Gallup polling shows only 50 percent of Millennials strongly expect to be working for the same company within a year, reflecting the reality that the modern workforce is increasingly mobile and pension plans are not a major factor in recruitment and retention.

“The times where people dreamed about being a company man, company woman, are over,” Trujillo said. “What we see now is increased job mobility, cross-sector movements.”

Higher turnover is the norm in both the private sector and state government jobs across the country, she said. Individuals in Generation Z are expected to hold 18 different jobs over their working life, compared to 12.4 for Baby Boomers.

When asked to rank the factors that would impact whether they accept a job working for the government, young workers ranked pension benefits last, Trujillo noted. Personal satisfaction and salary were the top two considerations.

Among the broader workforce, including individuals of all ages, pension benefits ranked seventh on a list of factors that would lead an individual to accept work as a government employee.

Also, Trujillo said less than half of government employees nationwide last more than five years, meaning the majority do not vest in government pension systems before switching jobs.

Furthermore, research has shown pension benefits are such a low priority that most government employees cannot even accurately describe their retirement plan.

Since 2015, new Oklahoma state government employees have been enrolled in a 401(k)-style retirement plan. While state government employee turnover has been higher in recent years, Trujillo noted that has been true of all jobs, not just state government workers.

“We do see that turnover rates in Oklahoma are very much in line with the private sector,” Trujillo said.

In addition, turnover in the Oklahoma state government workforce is lower than the government-job turnover in three of six bordering states—and the three states with higher turnover do not require employees to enroll in 401(k)-style plans but instead provide guaranteed benefits. (Public data are not available for two of the six bordering states. Reported turnover is lower only in one of six bordering states—Colorado.)

Giesecke similarly noted that defined-benefit plans have less impact on employee recruitment than what advocates suggest because most workers leave state employment before vesting. He noted that the average minimum vesting period for a state defined-benefit pension plan is 6.9 years, but 62 percent of public workers leave for other employment before reaching that mark.

Many defined-benefit pension plans also include provisions that contribute to higher turnover. For example, Giesecke noted that many state pension plans have a “rule of 55” that allows people to retire as soon as an individual’s combined age and years of service equal 55.

“This is an incentive to retire early,” Giesecke said.

In the area of education, specifically, the number of classroom teachers employed in Oklahoma public schools is three percent higher today than in 2014, although there has been a slight decline in the last five years. Among the teachers who leave the profession, most do so before hitting the five-to-seven year requirement for vesting in the state pension system, officials said.

In the current state budget year, over $448 million was deposited into the teachers’ retirement system to keep it solvent, an amount comparable to funding for the sixth-largest state agency, Ward noted. From 2005 to 2025, tax deposits to the teachers’ retirement system have increased by 173 percent (70 percent after adjusting for inflation).

Oklahoma requires a lower teacher contribution to the state retirement system than what is mandated in several neighboring states. While Oklahoma teachers must contribute seven percent of their earnings to the retirement system, teachers in Colorado, Missouri, New Mexico and Texas all contribute between 8.25 percent and 14.5 percent of their salaries to those states’ retirement systems. And teachers in three of those states—Colorado, Missouri, and Texas—cannot participate in Social Security.

That means that over time, Oklahoma’s system provides more take-home pay to teachers while still offering sound retirement benefits, Ward said, making Oklahoma’s system financially attractive.

“This structural difference presents a significant advantage for Oklahoma teachers as it allows them to retain more of their earnings while still benefiting from a robust pension system,” Ward said.