Research & Commentary: Michigan Teacher Pension Reforms

Published August 6, 2012

Michigan lawmakers are considering addressing the state’s debilitating $22 billion teacher pension deficit by switching incoming state teachers to a 401(k)-style plan instead of the traditional defined-benefit plan.

Gov. Rick Snyder and other lawmakers have stated concerns such a transition would cost taxpayers too much, but because the unfunded liabilities are so large nearly everyone involved agrees the pension system needs reform. Government workers’ pensions are constitutionally guaranteed (though retiree health benefits are not), meaning the state must pay them before most other obligations. If the problem continues, pensions will crowd out every other public expenditure, including K-12 education spending, public university support, infrastructure such as roads and bridges, and services to the poor.

In addition to falling short of optimistic estimates about investment returns, legislators’ political incentives ensure a defined-benefit system remains underfunded because politicians bump benefits during good times and shortchange the system during bad times. Even constitutional language prohibiting the state from pushing its retirement costs to the future did not prevent it from doing so. The twisted incentives inherent in defined-benefit public pensions should be replaced by policies that give individuals maximum control, flexibility, and responsibility.

Thus reformers argue the best alternative is to transition to a system that prevents the state from creating long-term underfunded promises. That means eliminating new enrollment in defined-benefit plans and instead offering new employees a defined contribution plan similar to a 401(k).

The following documents offer more information about teacher pension reform.


Michigan Senate Delays Vote on Changes for Teacher Benefits
Although it earlier approved switching the state’s teacher retirement benefits to 401(k)-style plans, the Michigan Senate rejected the House’s version of the pension reform bill, leaving changes to conference committee negotiations, the Lansing State Journal reports. House Republican leaders and Gov. Rick Snyder argue it’s too costly for the state to switch to 401(k)-style pensions entirely, while Senate leaders argue it’s too costly not to.

Walking in Scott Walker’s Footsteps
Writing for the New York Daily News, Jason Richwine and Andrew Biggs explore how state leaders can learn from Wisconsin Gov. Scott Walker’s recall and government benefits victories. Getting local, state, and federal books in order needn’t require eviscerating government jobs’ pay and benefits, they write, but bringing them closer to what private-sector workers earn. They discuss the contributors to this imbalance and identify several ways to right it: ballot initiatives that limit public benefits; weakening unions’ ability to obstruct reforms; and demanding more accurate and transparent government accounting.

Five Options for Addressing ‘Transition Costs’ When Closing the MPSERS Pension Plan
Michigan’s $17.6 billion unfunded liability and large annual payments for public school employees’ pensions mean it’s time to switch from defined benefits to a 401(k)-style program, writes James Hohman in a study for the Mackinac Center for Public Policy. He discusses five ways lawmakers could ease the transition costs of the switch.

Estimated Savings From Michigan’s 1997 State Employees Pension Plan Reform
In 1997, Michigan lawmakers moved employees in one of the state’s pension systems from a defined benefit system to a 401(k)-style system. Writing for the Mackinac Center for Public Policy, Richard Dreyfuss analyzed the financial results this had for the state and taxpayers, concluding that in the first 13 years of the new system it saved $167 million in normal pension costs, $2.3 to $4.3 billion in unfunded liabilities, and unquantifiable sums in better political incentives regarding pension spending.

Understanding Public Pension Costs: The Example of Wisconsin
Public pension costs are considerably greater than most governments estimate, and a proper understanding of the real cost is the first step toward reform, writes Jason Richwine in a Heritage Foundation Issue Brief. Richwine explains how government rules allow states to pretend their pensions are much more secure than they truly are, and how accurate accounting reveals the extremely high costs of public-sector pensions.

A Better Way to Pay: Five Rules for Reforming Teacher Compensation
To recruit and retain the best teachers, policymakers should avoid across-the-board pay increases and focus instead on performance pay by easing restrictions against entering the profession and basing tenure decisions on classroom performance, writes Jason Richwine in a Heritage Foundation Backgrounder. Retirement benefits should take the form of 401( k)-style plans to avoid the cost overruns and irrational retirement incentives created by traditional pensions. Traditional pensions push lawmakers to increase taxpayer costs more than budgets can bear, and they hurt teacher recruiting and retention because they do not allow younger teachers to take away the money they have earned and they encourage older teachers to retire relatively young.

Dues and Deep Pockets: Public-Sector Unions’ Money Machine
Public-sector unions are vastly different from other interest groups because of laws granting them unique access to political privilege and money, writes Daniel DiSalvo in a report for the Manhattan Institute. Today’s debates about the role of these unions should include not just consideration of their influence on government pensions, worker bloat and inflexibility, and health care costs but also how unions affect political outcomes. Unions’ special access to members and money is the source of their political power and the subject of DiSalvo’s report.


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If you have any questions about this issue or The Heartland Institute, contact Heartland education policy research fellow Joy Pullmann, at 312/377-4000 or [email protected].