Commentary
Fix the Real Problem of the Pension System
After reading Rep. Chuck Moss's rebuttal to a spot-on editorial recently published in The Detroit News, a reader might conclude that the only problem with the school employee pension system is that it's underfunded. The $22.4 billion gap between the system's assets and liabilities is a symptom that exposes the real problem: politicians can't be trusted to properly fund a defined benefit pension system.
State politicians underfund the system in a couple of ways. They use overly optimistic assumptions about investment earnings and payroll growth. Overestimating these means that the state doesn't put in as much as it should.
Politicians also have ways to squirm out of making contributions at certain times. In 2007, when the stock market was booming, the state improperly "marked to market" the pension fund's assets. This was done exclusively so that legislators wouldn't have to put in as much money as they thought they would.
The underfunding problem can only be fixed by gradually phasing out the defined-benefit pension system, which is done by closing it to new hires who instead get a defined-contribution 401(k)-type benefit.
A plan passed by the state Senate does this, but the House plan just perpetuates the problems.
The House did pass a couple of reforms that address Rep. Moss's concerns over “normal costs” and so-called transition costs. Senators can adopt those if they'd like, but compared to the Senate's reform they're just tweaks.
The only real solution is closing the system.
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Fix the Real Problem of the Pension System
After reading Rep. Chuck Moss's rebuttal to a spot-on editorial recently published in The Detroit News, a reader might conclude that the only problem with the school employee pension system is that it's underfunded. The $22.4 billion gap between the system's assets and liabilities is a symptom that exposes the real problem: politicians can't be trusted to properly fund a defined benefit pension system.
State politicians underfund the system in a couple of ways. They use overly optimistic assumptions about investment earnings and payroll growth. Overestimating these means that the state doesn't put in as much as it should.
Politicians also have ways to squirm out of making contributions at certain times. In 2007, when the stock market was booming, the state improperly "marked to market" the pension fund's assets. This was done exclusively so that legislators wouldn't have to put in as much money as they thought they would.
The underfunding problem can only be fixed by gradually phasing out the defined-benefit pension system, which is done by closing it to new hires who instead get a defined-contribution 401(k)-type benefit.
A plan passed by the state Senate does this, but the House plan just perpetuates the problems.
The House did pass a couple of reforms that address Rep. Moss's concerns over “normal costs” and so-called transition costs. Senators can adopt those if they'd like, but compared to the Senate's reform they're just tweaks.
The only real solution is closing the system.
Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.
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