Michigan Reforms Pension System, Offers Teachers a 401(k) Plan

Published September 10, 2017

Senate Bill 401 offers future hires “a generous defined-contribution, 401(k)-style retirement plan, or they can opt in to a defined-benefit pension,” the Mackinac Center for Public Policy reported in July. “Teachers who choose the conventional pension benefit will assume half of the responsibility to ensure the pension system is properly funded. And if the plan does not remain properly funded—maintaining assets of 85 percent or higher of the required funding—it will be automatically closed to new members.”

Snyder signed SB 401 into law in July. It will take effect in February 2018.

Long Time Coming

The Mackinac Center reports the Michigan Public School Employee Retirement System “[takes] up more than a third of school district payrolls, forcing layoffs and creating painful budget choices for local school boards.”

Senate Majority Leader Arlan Meekhof (R-West Olive), says the reform was a long time in the making.

“Retirement reform had been a topic in our state legislature for years,” Meekhof said. “The state has billions in retirement legacy obligations. There were many legislators and staff who worked to draft the policy that ultimately became law. One senator in particular, [state Sen.] Phil Pavlov (R-St. Clair Shores), had been working on various bills for the past few years.

“The desired goals of retirement reform were to reduce risk to taxpayers, preserve benefits for those already in the pension system, and to offer new employees a more competitive and modern retirement option,” Meekhof said.

‘Massive’ Underfunding

James Hohman, director of fiscal policy at the Mackinac Center, says Michigan’s new law addresses a common and growing problem.

“This tackles the key problem that every pension system in the country shares,” Hohman said. “Our politicians promise benefits and do not put aside enough money to keep those promises. These massive amounts of underfunding have hurt teachers and taxpayers alike. This pension system has been underfunded 42 of the past 43 years, plaguing the state for generations. The $29 billion that we owe is not going to pay itself down.”

Opposition Overruled

Snyder initially argued for offering employees additional options instead of closing the current plan to new employees. The Michigan Education Association, the state’s largest teachers union, also opposed the new plan. Hohman says the new system is in teachers’ best interests.

“While the union has not been supportive of these reforms, it didn’t stop lawmakers, and I think their members are going to benefit from this act,” Hohman said.

Ashley Bateman ([email protected]) writes from Alexandria, Virginia.

Official Connections:

Michigan state Sen. Arlan Meekhoff (R-West Olive): http://www.senatorarlanmeekhof.com/contact/