State pension funds across the United States are on the brink of insolvency, with billions of dollars in unfunded liabilities threatening to force state taxpayers into costly bailouts. A growing consensus among financial analysts and policymakers is that this crisis is not just a local issue but the tip of a much larger problem. The financial underperformance of state pension funds has been exacerbated by decades of mismanagement, risky investment strategies, and a lack of accountability, now putting the financial burden on ordinary citizens.
One of the most severe cases is in the state of Ohio, where the State Teachers Retirement System (STRS) is on the verge of insolvency. According to a recent report by the nonpartisan Equable Institute, Ohio’s pension system is currently in a massive financial hole, with an estimated debt of somewhere between $20 and $30 billion. The report highlights that a significant portion of this problem is tied to the fund’s investment practices—specifically, its ongoing reliance on active management strategies that have consistently underperformed.
For decades, the STRS has pursued an active investment approach, even as overwhelming data indicates that passive index-based strategies are more predictable and yield greater long-term returns. This has led to a chronic underperformance of the fund’s investments compared to major market indices. In an attempt to mask these underperforming results, the fund has constructed a benchmark that is not easily replicable, allowing administrators to claim success while the fund’s true state remains unaddressed.
Beyond the investment strategy, the Ohio pension crisis is compounded by a culture of excessive spending by pension administrators. Documents show that the fund has been paying out lavish benefits to its own staff, including high salaries, luxury perks, and even services such as $1,500 monthly plant-watering contracts. Meanwhile, teachers who contributed to the system over decades have not received the guaranteed cost-of-living adjustments they were promised, effectively reducing the value of their pensions and further straining the financial health of the fund.
These issues are not limited to Ohio. Across the United States, state pension funds have underperformed compared to their international counterparts and private-sector rivals. Research shows that U.S. public pension funds have consistently fallen behind passive indexes by approximately 50 basis points annually since the 2008 financial crisis. This trend has been largely driven by the preference for active management and a lack of transparency, as well as the resistance of teachers’ unions to push for needed reforms.
Teachers’ unions have played a particularly contentious role in the pension crisis. In many states, union representatives on pension boards have used their influence to block transparency and accountability, resisting any efforts to reform the system. In Ohio, despite an election in which a union-backed slate of candidates won a majority on the STRS board, those elected members quickly embraced the same flawed system as before—favoring staff bonuses and calling for a taxpayer-funded bailout. This has led to growing frustration among taxpaying citizens, who are now calling for stronger reforms to ensure that pension funds are held accountable for their mismanagement.
In response to these developments, the Ohio legislature has taken some initial steps, including restructuring the STRS board and beginning a transition to a flat income tax model. While these actions are seen as significant, many believe they are only the starting point. For the pension crisis to be resolved, stronger measures will be required, including demands for full transparency and accountability from pension administrators, as well as legislative action to prevent further underfunding.
The financial implications of the pension crisis extend far beyond Ohio. With other state pension systems across the U.S. already on notice of the consequences, there is fear that a taxpayer bailout in Ohio will set a dangerous precedent. This could lead to a nationwide wave of bailouts, where state taxpayers may once again be forced to foot the bill for mismanaged public pensions. If the pattern continues, the message is clear: mismanaging billions of dollars and ignoring fiduciary responsibilities will only result in taxpayer-funded solutions.
Solving this crisis requires a fundamental shift in how pension funds are managed. Transparent, passive investment strategies—like those used by some of the world’s best-run pension systems—should replace the risky active strategies that have consistently underperformed. State legislatures throughout the U.S. must act quickly to protect taxpayers from the financial risks associated with the growing pension shortfall, especially as the situation in Ohio has already demonstrated the urgency of this issue.