Defined-Contribution Retirement Reform Introduced in Michigan

Sen. Rick Jones, R-Grand Ledge, has introduced legislation that would offer new Michigan public school employees a defined-contribution retirement plan instead of the state’s current pension plan. This would begin to contain the underfunding problems of government pension problems and save taxpayers billions over time while ensuring that the state meets its promises to retirees. Plus, it would help bring government employees’ benefits in balance with the private-sector.

The benefits provided by the public school retirement system are expensive, costing each district 23 to 24 percent of an employee’s salary. It also requires most workers to pay up to 6.4 percent of their paychecks into the system. In contrast, the private-sector plans offered by major Michigan private-sector companies cost 5 percent to 7 percent of payroll and have no mandatory employee contributions. The proposed legislation would include a maximum cost to taxpayers of 7 percent for pension benefits, right at those rates, and paticipants should also applaud the lack of mandatory contributions.

The state already closed its state employee pension plan to new members in 1997. Earlier this year, we estimated that it saved taxpayers $167 million in annual pension costs and an additional $2.3 billion to $4.3 billion in unfunded liabilities.

Currently, the public school retirement system is behind on its pension obligations by $17.63 billion. This is the difference between what the state has set aside to pay in pensions and what it expects its employees and retirees to have earned. So these costs are going to be paid by taxpayers one way or another. Changing over to a defined-contribution plan keeps the state from racking up much more. It also ensures that the catch up costs — about half the employer contributions — will eventually go away.

Closing the pension system is needed to make the it affordable, predictable and current, as Richard C. Dreyfuss, an adjunct scholar with the Mackinac Center, remarked. In the end, that will benefit workers who will be paid what they are promised and for taxpayers who would no longer be on the hook for expensive pension underfunding.