Study: State Employee Pension Reform Has Saved Taxpayers Estimated $2.3 Billion to $4.3 Billion in Unfunded Pension Liability

Shifting new MSERS employees to individual retirement accounts has “improved political incentives” and reduced taxpayer risk, according to author

For Immediate Release
Thursday, June 23, 2011
Contact: Rick Dreyfuss
Adjunct Scholar
or
Michael D. Jahr
Vice President for Communications
989-631-0900

MIDLAND — The 1997 reform that switched new state employees in the Michigan State Employees’ Retirement System from a defined-benefit to a defined-contribution plan has saved Michigan taxpayers an estimated $2.3 billion to $4.3 billion in unfunded state employee pension liability between 1997 and 2010, according to a new Policy Brief from the Mackinac Center for Public Policy. In the brief, “Estimated Savings From Michigan’s 1997 State Employee Pension Plan Reform,” Mackinac Center Adjunct Scholar Rick Dreyfuss analyzes the impact of the 1997 pension change and concludes the reform also saved taxpayers an additional $167 million in pension “normal costs.”

“Taxpayers’ savings from this seminal reform are significant and multifaceted,” said Dreyfuss, who also authored a 2010 Mackinac Center Policy Brief comparing state employee retirement systems to those of Michigan’s private sector. “Closing state employees’ traditional pension plan to new employees and placing them in a defined-contribution plan with individual retirement accounts was considered a dramatic step when the legislation was passed in December 1996. But a comparison of the performance of the two plans since then suggests the decision was sound. The reduction in taxpayer costs and risks has not only lightened a considerable burden on the state budget, but also improved Michigan’s long-term economic outlook, making the state more attractive to new business and investment than it would have been otherwise.”

The traditional state employee pension plan carried an unfunded liability of $4.1 billion at the end of fiscal 2010. Dreyfuss notes that this unfunded liability almost certainly would have been higher if new employees had continued to enter the plan after 1997. To calculate savings from the reform, Dreyfuss uses data from the Michigan Office of Retirement Services, the Michigan Senate Fiscal Agency and the state’s financial reports for the system. He estimates that if the plan had remained open, taxpayers would have been responsible for between $2.3 billion and $4.3 billion in additional unfunded liability as of 2010, the latest year for which data are available.

Using the same data, Dreyfuss also compares the annual “normal” cost of benefits provided to state employees under the traditional defined-benefit system to the annual cost of benefits provided by the defined-contribution system. He estimates that from 1997 through 2010, the lower cost of the defined-contribution plan has saved the state $167 million.

Dreyfuss stresses that the pension reform “has improved legislative political incentives.” With a defined-contribution plan, he notes, there can be no unfunded liability, and there are fewer political opportunities to increase pension benefits whose costs are deferred until later, a process that is currently occurring with the state employees’ traditional pension plan. “The Legislature’s management of the traditional plan has unfortunately placed a tax burden on a future generation that is currently too young to vote — something the defined-contribution plan does not do,” Dreyfuss observed. “Given the plan’s structure and history, the 1997 reform has been a victory for taxpayers and a model for future reforms.”

The new Policy Brief is available at www.mackinac.org/15284. Dreyfuss’ October 2010 Policy Brief, “Michigan’s Public-Employee Retirement Benefits: Benchmarking and Managing Benefits and Costs,” is available at https://www.mackinac.org/13862.

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