New teachers and employees in Michigan’s government schools will be automatically enrolled in a defined-contribution pension plan instead of the current taxpayer-funded, hybrid pension plan, beginning next year.
Gov. Rick Snyder (R) signed Senate Bill 401 into law on July 12.
Starting February 1, 2018, newly hired teachers and school employees will be automatically enrolled in the new defined-contribution plan, similar to 401(k) pension plans enjoyed by workers in the private sector. They will have the option of joining the state’s current hybrid pension program, the Michigan Public School Employee Retirement System (MPSERS), on request.
If the ratio of MPSERS’ assets to liabilities falls below 85 percent for more than two consecutive years, the fund will be closed to new members. As of September 30, 2016, MPSERS held about $51.8 billion in assets and $68.9 billion in total liabilities, a funding ratio of approximately 75 percent.
‘Runaway Billions’ of Debt
The old, defined-benefit pension system was irreparably broken, says the new law’s original sponsor, state Sen. Phil Pavlov (R-St. Clair Shores).
“The biggest problem with the defined-benefit system is the runaway billions of dollars in debt that was collected,” Pavlov said. “There were structural problems with many of the assumptions that were used to guide the plan, and there was also a lack of responsibility to treat the debt in a serious way.”
No New Unfunded Liabilities
The new pension program gives government school employees more power over their financial planning, Pavlov says.
“Going forward, there is no chance of the defined-contribution plan collecting any unfunded liabilities,” Pavlov said. “Employees will be in control of their own plan. It’s more stable, more predictable, and more affordable.
“Once we start to pay the debt down, we’ll use that newfound dividend to pay teachers what they’re worth,” Pavlov said. “For so long, teachers agreed to give up pay increases just to hold onto a benefit that was substandard, and they ended up losing on both fronts. It’s time to put teachers in control of their future earnings, and not the unions.”
Time Will Tell
James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy, says paying off pension debt gives taxpayers a break.
“A system that wouldn’t have any debt would save taxpayers $2.5 billion, so that’s a huge amount of revenue that can be spent or returned to taxpayers via tax cuts,” Hohman said. “It’s going to take a long time for those savings to materialize, because there is already a $29 billion unfunded liability in the system. It’s going to take a while to pay that off.”
Michigan lawmakers had better keep up the good work on pension reform, Hohman says.
“This still leaves the door open for the state to develop some unfunded liabilities in the hybrid plan, and I’m very concerned about that,” Hohman said. “The state’s going to have to work hard to ensure that the hybrid plan does not fall into the same problems that every other government pension system has fallen into.”