Column: Current pensions a fiscal cancer

John Reilly

It shouldn’t be controversial to fix one of the worst policy blunders facing our state: the government being liable for tens of billions of dollars it doesn’t have, costing hundreds of millions of dollars in interest every year.

Michigan’s public school employee pension system has a $29 billion unfunded liability: $2,900 for every man, woman, and child in Michigan.

Michigan families did nothing to deserve this debt foisted upon them, but pension plans demand discipline and long-term thinking of employers. Politicians and bureaucrats have neither.

Surprise, surprise: the state over-promised the return on pension investments and kept quiet as the unfunded liability grew from $0 to $29 billion over the past sixteen years.

Imagine how it must have sounded when the government originally pitched the pension concept: “Instead of paying employees more money to allow them to invest in their own retirement, we’re going to give them a fixed amount, which most will forfeit when they change jobs. We’re going to invest their money for them, and if the investments don’t earn what we hope, the taxpayers will pay the difference — someday.”

The first mistake was using a system that put taxpayers at risk for investment performance. The second mistake was gambling on a high assumption of return. The third was not fully funding the pensions each year and allowing them to sink into a mire of debt.

The solution is simple: Stop the fiscal bleeding by giving new employees a 401(k) plan instead of a pension, and pay the debt.

The proposed 401(k) plan is better than a pension. Most employees forfeit their pensions because they change jobs before becoming eligible to collect retirement pay. A 401(k) is fully portable and employees keep their own money whether or not they make a decade-long commitment to the same job. A pension’s benefit is fixed, but in a 401(k) employees choose how to invest their savings. The proposed 401(k) plan is the same as all state employees have enjoyed for the past 20 years, and better than the one school employees can currently take.

So, why is anyone opposing that we treat this fiscal cancer? It must be political, because the opposing policy argument is ridiculous.

Besides the just-debunked notion that the proposed employee-owned 401(k) would be less desirable to teachers than the shackles of a pension, opponents claim it would cost billions in “transition cost.”

The “transition cost” is actually just the cost of paying down the unfunded liability over a 40-year period.

Yes, we’ll have to pay up for the pensions being cashed out as the system closes. That’s the nature of paying down debt. But the longer we keep kicking the can down the road, the more expensive it will be to ultimately get out of this mess.

Right now, schools have about $1,600 per pupil less to spend each year because of how much we spend just to pay down our unfunded liability. The sooner it’s paid, the sooner we can move on.

The cost, by the way, is not even very much. It’s less than 1 percent of the state budget. It’s a small price to pay our debt and have a system with long-term stability. Every year we postpone making the change, we waste more money.

It’s long overdue that we empower our public school teachers to control their own retirement funds, instead of using fixed plans that force taxpayers to pay the price of bureaucrats’ failure as investors.

It is our moral obligation to balance our budgets and provide employees with a stable retirement and treat this fiscal cancer once and for all.

State Rep. John Reilly, R-Oakland, represents Michigan’s 46th district.