It is unfortunate that government employees are often blamed for underfunded government pension systems. When concerns are raised that retirement systems owe members billions more than has been saved, high-earners and early retirees are viewed as the culprits. Policymakers in return cut the generosity of the plans. Yet these policy reforms will not fix the basic problems faced by pension systems.

In 2010, Michigan’s school employee pension system was underfunded by $12 billion, not including the value of promised retiree health care benefits. Lawmakers sprang into action. They increased employee contributions to the system and made new employees' benefits less generous.

In 2012, Michigan’s school employee pension system was underfunded by $22.4 billion, not including the value of promised retiree health care benefits. Once again, lawmakers sprang into action. They increased employee contributions to the system, made benefits offered to new employees less generous, and reduced some of the benefits of current retirement system members.

These reforms made lots of changes to Michigan public school employee retirement benefits, but their focus on generous benefits as the cause of underfunding was misguided.

The $10.4 billion growth in unfunded liabilities between the two reforms was not due to more people gaming the system (although it happens). It wasn't the result of employees not paying their fair share into the system. The real culprit was the state’s failure to meet the system’s own actuarial assumptions of how much needs to be contributed each year to cover future benefits. 

A 2014 performance audit of the retirement system found that the lack of investment gains compared to their assumed returns was responsible for 93 percent of the underfunding over the past 10 years.

Lawmakers made the system less generous to employees based on assumption that generous benefits were behind the underfunding problem. But actually, it was the system's underlying assumptions about the pension fund's projected investment returns that caused the most damage.

A few minor things have been done about this. The 2012 reforms allowed new employees to participate in a defined-contribution retirement plan, and roughly 20 percent choose this option. The 2010 reforms also reduced the assumed return on pension fund investments from 8 percent to 7 percent for newer system members. These are improvements.

But in the end, the solution is clear: The state should stop putting new school employees in defined-benefit pension plans. Instead of tinkering with a failed model, all new school employees should be offered defined-contribution retirement benefits instead.

These plans belong to employees themselves and are are paid as they are earned, which makes it impossible for the state to generate billions of future unfunded liabilities on their behalf. Preventing new liabilities will help the state honor the pension promises already made to current staff and retirees. Because it's not their fault the state has failed to properly fund their retirement benefits.

www.mackinac.org/pension

The 11th edition of the highly respected report Economic Freedom of North America has been released and it has good news for Michigan. In the index Michigan ranks 27th among the 50 states.

The 2015 freedom index — this year’s data runs through 2013 — attempts to measure the degree to which governments across Canada, the United States and Mexico restrict (or permit) economic liberty. It is produced by the Fraser Institute, a Canadian research organization, based in Vancouver, British Columbia.

At 27th, Michigan is tied with Iowa and Utah. The top-ranked state for economic freedom was New Hampshire, followed by South Dakota, Texas, Florida and Tennessee. New York finished dead last. The other least-free states included California, Alaska, Hawaii and New Mexico.

Michigan’s middling performance may not seem impressive but it does reflect improvements over time. Dean Stansel, one of the architects of the report, tells me that Michigan has moved up from 40th based on 2010 data to 33rd in 2011 and 27th for both 2012 and 2013.¹ These changes in the “more free” direction are nothing to dismiss as they could portend greater economic well-being for the Great Lake State.

The authors of the index note that per capita personal income in the most-free states was 7 percent above the national average compared to 8 percent below in the least free. It is unlikely that this is simply a coincidence.

Economists have long investigated how and why some nations and people grow rich, using a number of valuable categories. Their conclusions are usually mundane: property rights, the rule of law and an ability to engage in voluntary exchange often rank high on the list of qualities associated with national wealth. In other words, economic freedom matters and the Fraser Institute’s index is one way to measure economic liberty and make comparisons by country and by subnational units of government.

The index is built around data compiled on such things as the size of government, laws governing labor markets and the level and types of taxation. Within each of these major categories are ten subcategories. As one example, under the size of the government the index uses data such as government expenditures as a percentage of personal income. The authors rank each of these variables on a scale of one to ten and total the scores in each area. A score of 10 represents the greatest freedom and a score of one the least.

The authors describe each area and subcomponent in detail and — much to their credit — are 100 percent transparent about their data sources. The data from each category is made available by the Fraser Institute on its “Free the World” website that hosts the study. Previous editions and datasets from the study have been used by other scholars in their own work.

Economic freedom is associated with almost every objective measure of human well-being, including longer lives, lower death rates among children and greater incomes.

Michigan has made important strides in the past few years. But more needs to be done to restrain the state’s ability to lord over — if not unnecessarily interfere with — the lives of its citizens.

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¹These rankings are based on a slightly new methodology. Direct comparisons to previous year’s reports will show different rankings by state.