Pensions are once again on the docket for Michigan lawmakers, and the sooner they tackle this ballooning problem, the better for everyone in the state. The cost of keeping up with billions in unfunded liabilities is a drain on taxpayers, schools and local governments.
Both the House and Senate have signaled this is a priority, and bills are in the works. Senate Education Chairman Phil Pavlov, R-St. Clair Township, is leading the charge in his chamber.
Lawmakers should commit to real reform this time. Various attempts to rein in retirement costs the past seven years have made miniscule dents in the pension crisis.
The Michigan Public School Employees’ Retirement System, known as MPSERS, poses major challenges with unfunded liabilities that have now topped $29 billion.
According to an analysis by the Reason Foundation, MPSERS ’ pension debt has increased from less than $2 billion to current levels over the past 15 years.
“If Michigan continues to ignore the problems with MPSERS, then pension costs are likely to more than double over the next two decades,” Reason concludes. “Specifically, the actuarially determined contribution for the state and school districts will likely spike from around 30 percent of teacher payroll to around 60 percent of teacher payroll.”
These escalating pension costs are taking money from other education priorities — impacting teacher salaries and classroom expenditures.
What’s needed is a switch to a defined contribution, 401(k) style plan for all new employees. Current teachers need not worry: The state by law can’t mess with their pensions.
But moving new teachers and school staff away from an unsustainable system is the best long-term solution.
Lawmakers were close in 2012 to making this switch, but resistance from some in the Legislature, as well as Gov. Rick Snyder, quashed the efforts. A defined contribution plan was created, but it’s only one of the options for school employees. Just 20 percent of new employees have chosen 401(k) accounts since 2012 over the more traditional defined benefit plan.
Snyder, along with the Office of Retirement Services, which administers these retirement accounts, feared the transition costs that would come with moving new employees out the old system. But these costs are often overblown. While some upfront investment is needed while the transition takes place, it’s doable.
Not making the switch is a more costly bet, says James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy. Taxpayers are now spending $2 billion mostly to catch up on pension underfunding.
“It’s a huge expense,” Hohman says.
State government workers switched to a defined contribution plan in 1997, and that transition didn’t collapse the system.
Moving away from pensions could benefit school employees, too. Teachers have to be vested for 10 years in Michigan to earn any of their pension benefits. Since many teachers leave the profession before vesting, a more portable retirement plan could work better for them.
It would also bring government employees more in line with private sector workers whose taxes pay their salaries. More than 80 percent of state and local governments offer defined benefit pensions. Yet only 7 percent of employees in the private sector have these plans.
A report presented to the West Michigan Policy Forum in September estimated the state has $51.4 billion of unfunded retirement liabilities, putting Michigan in the bottom 10 states for its financial standing.
As business leaders have said, restructuring government employees’ pension plans should be the top policy priority in Michigan. School pensions are an excellent place to start.