A case study
A representative teacher in a typical Michigan school district can retire at age 56 and immediately begin collecting state benefits worth $48,161 annually, including $35,640 in pension and $12,521 in health insurance benefits. The insurance benefit cost assumes the person has a dependent spouse but no dependent children.
At age 65, this couple’s cash income would increase to $65,160 as they begin collecting Social Security, plus the value of health benefits. From that point, the cost of their health benefits are divided between federal Medicare and the state retirement system for school employees. Returns on any savings accumulated by the couple during a 30-year teaching career would add to their income.
Three features stand out in this representative example.
First, the teacher begins collecting full (state) retirement benefits at an early age compared to the average private-sector worker, and could collect these benefits for almost as many years as the person worked.
Second, the benefits also include a comprehensive health insurance policy — also extremely rare in the private sector, where most workers must wait until age 65 to be eligible for Medicare.
Third, the state health care benefits are completely unfunded (deliberately so), and so is a significant portion of the state pension benefits (due to flawed assumptions by past state pension officials, and deliberate decisions by past legislators to short-change pension contributions). In other words, most of the costs of the benefits promised by past politicians are paid for by future taxpayers who get no service from this retiree. Given the inherent political incentives, this is the norm in traditional “defined-benefit” government retirement systems.
The amounts in this example are estimates based on state and national averages, and on typical Michigan school employee contracts. The actual amounts collected by any actual school retiree will vary, and can be significantly less than this example shows. Here are the assumptions it uses:
- The teacher worked for 32 years under a typical district’s current salary schedule with 2 percent annual “across the board” increases in addition to “step” and “lane” increases.
- The health insurance policy provided to a school retiree with a spouse costs the state $12,521 annually. This falls to $5,810 when the couple becomes eligible for federal Medicare coverage.
- Both spouses begin collecting the average Social Security benefit payment of $14,760 at age 65.