Pension Costs Are Crowding Out Public Safety

A report from the state House Fiscal Agency shows that there has been a steady decline in the number of police officers in Michigan, falling 15.4 percent from 1990 to 2015. The report does not go into why this is, but here’s one theory: Pension underfunding is crowding out government spending, including hiring decisions.

Consider that the state police retirement system now costs between 57 percent and 63 percent of the Michigan State Police’s total payroll. It is not because the benefits are lavish. It is because the state is trying to pay for promises that it made in the past but didn’t set money aside for — the state saved only 63 percent of what pensions are expected to cost. And while the state may be able to rescind benefits for retiree health care, it has saved only 12 percent of what its current health insurance policies have cost.

Essentially, the state could increase its trooper workforce by 33 percent if employees had been offered retirement benefits at private sector averages.

Local government pension systems are underfunded as well. Our work in 2014 found counties had average funding levels of only 74 percent. And police unions have resisted the municipal trend toward defined contribution retirement, making them more susceptible to crowd-out. In other words, Michigan is trading pension costs for fewer police officers on the street.

This is a well-documented problem facing governments across the country.

It is a problem which benefits neither the employees that face these payroll constraints, nor those who want more police services, nor the taxpayers that have to pay for them. Policymakers need to seriously consider offering new employees defined contribution retirement benefits that will be paid as they are earned. It might change some of the trends in government employment highlighted by the House report.