Pension Reform Failure Cost Michigan Taxpayers $6 Billion or More

It harms current employees and retirees as well

Scarce tax dollars are needed to fill the gap between what has been promised workers in the school pension fund and what the state has saved to make good on those promises. Yet some officials shrug off the underfunding as the cost of doing business.

The cost of underfunding pensions to school budgets is massive: $6 billion to $7.8 billion would have been saved if employees had been offered defined-contribution benefits over the past decade — enough to pay for every public school teacher salary for a year.

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Using pension officials’ own assumptions and projections, the state now owes current and future school retirees $26.5 billion more than it has saved. This year alone, catching up on that debt will cost schools an amount equal to 22.3 percent of their entire payroll. When the cost of pensions earned by employees in the current year is added, the total hit to school budgets this year is 25.95 percent of payroll.

When these same pension officials lobby against closing the defined-benefit system to new employees, they ignore the underfunding. But the system has carried more liabilities than assets in all but one of the past thirty years.

Over the past decade the size of the unfunded liability has more than quadrupled, from $6.1 billion in 2006 to the current $26.5 billion. So when legislators compare the costs between the current system and a defined-contribution system, they need to include an extra expense in the former for paying down its unfunded liabilities.  

Imagine instead that the state had been paying 5 percent of payroll into employee defined-contribution plans. Doing so would have saved schools and taxpayers $7.8 billion over the past decade. A more generous plan with 7 percent contributions would have saved $6 billion.

pension costs

The state has an obligation to deliver the pension benefits that were already earned by current employees and retirees. So it is not possible to flip a switch and start realizing these kind of savings right away.

It is possible to adopt this reform going forward, and the Legislature should do so immediately. This will contain future damage and put the state on a path to gradually eliminating legacy costs.

Continuing the current perpetually underfunded system is unfair to retirees who must worry about their pensions, and to current employees whose compensation is limited by the state’s need to service unfunded liabilities. And of course it is unfair to taxpayers, who are ultimately responsible for government pensions.

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