A Policy Change That Saved Billions

When a solid public policy idea is advanced by a principled and determined elected official, good things happen. When that official takes a political risk in doing so — with little chance of any offsetting political gain — he deserves recognition. 

Such was the case in 1996 when Michigan Gov. John Engler pushed through a reform that made Michigan a leader in pension policy. The state closed its state employees’ pension fund to new members and instead offered them a 401(k) retirement plan, something many private companies had done, but no state government had adopted.

Engler drew political fire for the policy change, but for the next 15 years no one performed a financial analysis to see whether the move had saved taxpayers money. That is, until June when the Mackinac Center published “Estimated Savings From Michigan’s 1997 State Employees Pension Plan Reform,” a policy brief that found the change had fundamentally altered Michigan’s pension liabilities and saved taxpayers billions of dollars.

The brief’s author, Richard Dreyfuss, found that closing the state pension plan saved the state $2.3 billion to $4.3 billion in unfunded liability — the amount the state has promised to pay in retirement benefits above what it has saved to pay for it. In addition, the state’s new defined-contribution retirement plan saved money because its costs cannot exceed 7 percent of an employee’s salary, while the pension benefits cost 8.1 percent in the most recent year.

The brief also found that closing the pension system altered the political incentives for funding the plan. Michigan politicians are no longer able to push payments for service off to the future or use pension funds to supplement preferred policies, like offering current employees or retirees pension boosts during good times.

Coverage of the report’s findings was highlighted by Bloomberg News, The Lansing State Journal, Business Insider, WILS, and other outlets.

The findings should serve as a warning to state officials regarding the school pension fund, which is $17.6 billion short in covering school employee pensions.

Several legislators made it clear that they were interested in pension reform when they set $133 million of the school budget aside to lower the state’s retirement obligations. On Sept. 7, Sen. Rick Jones (R-Grand Ledge) introduced legislation that would close the “defined benefits” school pension system to new public school employees, and instead offer a 401(k)-style retirement plan. In May, Rep. Bill Rogers (R-Brighton) introduced
a bill to transition state employee post-retirement health care benefits to a defined-contribution Health Savings Account system.

Should policies like these become law, Center analysts may be tallying even greater savings in the future.