Pension Reform

ALEC Applauds Michigan’s MPSPERS Pension Reform Efforts

The time for reform clearly is now

The American Legislative Exchange Council (ALEC) commends the Michigan House and Senate for passing comprehensive reforms to the Michigan Public Schools Employees’ Retirement System (MPSERS). For years, financial experts from ALEC and other concerned organizations such as Mackinac Center have worked closely with legislators to educate on the causes and extent of these unfunded liabilities. Numerous ALEC members serving in the Michigan legislature have remained dedicated to reducing the long-term risk to taxpayers of being forced to bail out these underfunded pension systems. If Governor Synder signs this reform into law, the risk is of pension insolvency is substantially diminished.

The current hybrid pension plan in place since 2010 for MPSERS represented a solid step in protecting employees and taxpayers. But according to the ALEC report Unaccountable and Unaffordable 2016, Michigan’s pensions are the 5th worst funded in America despite these modest reforms. The unfunded liabilities exceed $15,800 for every man, woman and child in Michigan using a risk-free rate of return. These pension reforms begin to address those daunting challenges and, if implemented properly, would result in a national model for reform and establish Michigan as one of the brightest turnaround stories among the states.

In particular, the new hybrid defined contribution/defined benefits plan includes the following basic reforms:

  • Requiring the school system and employees share the costs of future unfunded liabilities equally.
  • Closing this new hybrid plan to new employees if the funded ratio remains below 85 percent for two consecutive years. This funding ratio requirement helps ensure the unfunded liabilities do not continue to soar and will prod the government to meet its annual obligations for the defined benefit component.
  • Increasing the 50 percent employer match from 3 percent of a participant’s compensation to 4 percent.
  • Raising the retirement age in certain instances if longevity increases.
  • Assuming a more modest 6 percent rate of return, rather than the current 7 percent

Of special note, teachers, especially millennials, benefit from the portability of the 401k component, which empowers workers to make career and geographic decisions based on their own aspirations and preferences, rather than out of fear of losing retirement benefits.

The time for reform clearly is now. Constantly deferring funding for the present value of promises made to current workers is the primary reason pensions cost 37 percent of payroll instead of 5 percent of payroll. If annual contributions had been prudently made, investment revenue from accumulated plan assets would be far higher than the present time. This reform phases out the state’s ability to push the costs of today’s government onto tomorrow’s residents. Failure to address this looming crisis means one or more of the following: higher tax burdens, cuts in essential government services, or reneging on promises to public sector retirees. Fortunately, this reform package preserves retirement security for existing and future employees while putting in place a more fiscally sustainable benefit for new workers.  Both teachers and taxpayers win.

In Depth: Pension Reform

Modern, 401(k)-style plans are now commonplace in the private sector. For state workers, however, traditional pensions are still the norm. As former Utah State Senator Dan Liljenquist wrote in Keeping the Promise: State Solutions for Government Pension Reform, this is not a partisan issue, but a math problem. State Budget…

+ Pension Reform In Depth