Give Michigan teachers a better retirement plan
A bill to revise the retirement plan offered to Michigan teachers failed to pass the state legislature. That’s unfortunate, because it would have been better for Michigan teachers.
The bill would have closed the defined benefit pension plan offered to teachers and enrolled all new workers in a defined contribution plan like the one offered to Michigan state employees.
How would closing a pension plan be good for teachers?
First, Michigan teachers would have been eligible for retirement benefits much earlier in their careers. Right now, Michigan teachers have to stay 10 years before they qualify for even a minimal pension. According to the state’s own financial models, 57 percent of new teachers won’t make it that far. Under the new plan, teachers would have been eligible for half of their employer’s contribution after just two years, and 100 percent after four years. That would have meant more Michigan teachers had access to retirement benefits earlier in their careers.
Second, the new plan would have been more generous for teachers. According to the official fiscal analysis conducted on the bill, Michigan teachers currently receive retirement benefits worth just 4 percent of their salary. Under the proposed legislation, teachers would have received retirement benefits worth 7 percent of their salary. That would cost the state a bit more money, true, but Michigan teachers would have gotten more in the way of retirement benefits.
Third, the state would have stopped accruing the large unfunded liabilities that are eating into school budgets. In response to those debts, the state has already raised contribution rates and cut benefits for new teachers. Today, Michigan employers are contributing not just the four percent for benefits; they’re actually contributing more than 22 percent of each teacher’s salary toward the pension plan. That is now set to continue for the foreseeable future.
Those debt costs are bad for state taxpayers, and they’re bad for teachers. For a Michigan teacher earning $50,000 a year in salary, her employer is contributing an additional $9,000 just to pay down past debts. That has a negative effect on teacher salaries and other budget items. The new plan would have put the state on a responsible path to pay down debts and prevent it from accruing such additional debts in the future.
Fourth, and most importantly, the new plan would have provided all teachers with a path to a secure retirement, not just some of them. For workers covered under 401(k) plans with a four percent match, employees receive that amount in an individual, portable retirement account.
But that’s not the way Michigan’s teacher pension plan works. Instead, it deliver benefits through a back-loaded formula that is divorced from the state’s contribution rate, and those benefits provide only meager benefits to teachers with less than 20 or 30 years of experience.
Some fraction of teachers are better off under the existing plan. The state’s fiscal analysis included estimates under various scenarios for 35-year veterans of Michigan public schools. Depending on how stock markets perform, the existing system would be better for very long-term teachers in the eventuality that stock market returns are poor. That’s because the state will cover any deficits, but even beyond stock market predictions, only about 1 in 4 teachers will stay that long.
The state’s budget, and the vast majority of Michigan teachers, would have been better off under the proposed plan.
Chad Aldeman, editor of TeacherPensions.org, is a principal at Bellwether Education Partners.