The Lose-Lose Situation in Pension Funding

Pension underfunding, not defined contributions, is the problem

At an event sponsored by the West Michigan Policy Forum, Nick Ciaramitaro of Michigan AFSCME Council 25 criticized defined contribution retirement plans. They are, he argued, more expensive than defined benefit plans for the same benefit, creating a “lose-lose situation.” He is wrong — letting employees control their own retirement accounts would lower costs and give them control over their own retirement.

Pension plans in governments are expensive yet are not especially generous. The risk of underfunding adds an expense to them that is not present in defined contribution plans. Most of the money going into pension funds is not to pay for the benefits being earned by employees; instead, it goes instead to pay down unfunded liabilities. The state’s largest retirement system costs 36 percent of payroll and 87 percent of that goes to pay down unfunded liabilities.

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Promising benefits and paying for them later has created a hole in pension systems across the state. This is the real lose-lose situation, and it threatens retirees, current workers and taxpayers alike.

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