Study uses data for 24 large private employers in Michigan to benchmark MPSERS and MSERS pension systems; plans suffer from overly generous benefits, despite recent revisions, analyst concludes 

For Immediate Release
Monday, Oct. 25, 2010
Contact: Rick Dreyfuss
Adjunct Scholar
or
Michael D. Jahr
Senior Director of Communications
989-631-0900

MIDLAND — Michigan government's two largest pension systems — the Michigan Public School Employees' Retirement System and the Michigan State Employees' Retirement System — offer their members benefits that are out of line with those in Michigan's private sector and are unlikely to prove affordable in the long-term, according to a new study published by the Mackinac Center.

 Using proprietary data from the human resources consulting firm Aon Hewitt, Mackinac Center Adjunct Scholar Rick Dreyfuss, the study's author, compares MPSERS' and MSERS' pension and retiree health care benefits to plans offered by 24 major Michigan businesses in 2010. Dreyfuss found that none of the employers offered new employees traditional "defined-benefit" pension plans like MPSERS', which provides public school employees with an annual retirement income based on their final pay. Only six companies (25 percent) had any kind of defined-benefit pension plan available for new hires, and these were "cash balance" plans, which emphasize career earnings and tend to be less generous.    

"Most companies instead provided pension benefits only through a 401(k) plan or some other type of 'defined-contribution' pension plan, in which employees receive individual, tax-favored accounts into which they or their employer make ongoing contributions to help them save for their retirement," said Dreyfuss. "This arrangement is similar to what MSERS has offered new state employees since 1997, when a seminal reform ended defined-benefit pensions for new state hires."

Dreyfuss added, "While some of the higher pension benefits  are offset by the required school employee contributions, the net employer cost remains outside the 5 percent to 7 percent of payroll benchmark identified in the study."

As for retiree health care benefits, only three of the 24 companies — 12.5 percent — offered employer-subsidized insurance coverage, as MPSERS and MSERS do. Four companies (17 percent) offered retiree health insurance that was 100 percent paid by the employee.

"Retiree medical liabilities in both the private and public sector continue to be most problematic," said Dreyfuss. "For this reason, many private-sector employers have found these liabilities to be unsustainable and have significantly modified or eliminated coverage. While there have been some recent revisions to MPSERS and MSERS, the benefit comparisons remain unfavorable, and it is likely these liabilities will exceed current and future taxpayers' ability to pay."

 The differences between Michigan's private- and public-sector retirement benefits are a concern given the financial status of MPSERS' and MSERS' retirement plans. State taxpayers will be forced to pay an additional $15.1 billion to cover MPSERS and MSERS' unfunded pension liabilities, with $1.6 billion required next year alone. Taxpayers are scheduled to pay further costs of $24.6 billion to $40.2 billion to provide MPSERS and MSERS retiree health benefits, assuming the state continues to offer these benefits at their current level.

Dreyfuss cites evidence that large private employers have been moving away from the types of pension benefits offered by MPSERS and from the retiree medical benefits offered by both MPSERS and MSERS. He writes that Michigan "was visionary in converting to a defined-contribution plan for MSERS members in 1997."

Legislative revisions to MPSERS and MSERS since 1997, including reforms passed last month, have contained elements that shift financial costs of retiree benefits away from taxpayers and toward employees. Dreyfuss notes that while these changes have been "directionally correct," they will have a relatively small long-term impact on the plans' unfunded liabilities and costs to future taxpayers.

"With the 1997 MSERS reform, the state brought pension benefits for new state employees down to market norms by placing them exclusively in a defined-contribution plan that has, by definition, no unfunded liabilities," said Dreyfuss. "The state should consider a similar reform for new public school employees. Legislators should also recognize that the existence of employer-provided retiree medical coverage in 2010 is significant unto itself, given state and national trends. Few large companies now consider such benefits affordable."

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