Without reform, public school teacher pension plans will
become as unmanageable for taxpayers as autoworkers’ pension plans are for the
Big Three. Yet when considering legislation designed to address the problem, the
Michigan Legislature decided to punt, ignoring proven reforms.
It’s not like the pension crisis is a matter of conjecture.
Local governments and corporations have seen the writing on the wall and are
responding in real time.
On Dec. 6, The Detroit News reported that in order to cut
costs, city and county governments are moving away from defined benefit plans,
which guarantee employees a set monthly payment when they retire. A Wayne State
University finance professor told the News, "Defined benefit is going to go the
way of the dinosaurs."
The day before, Verizon Communications announced it would
freeze its defined benefit plan and instead expand its defined contribution, or
401(k), plan. According to Verizon, the change would affect 50,000 managers and
save the company around $3 billion over the next decade.
In response to the unpredictable legacy costs that are
burdening school districts throughout the state, the Michigan House tried to
address the same problem in early December. For nine hours the House debated a
bill to bring newly hired Michigan teachers in line with other public employees
by providing them with a defined contribution plan. Unfortunately, the
legislation was defeated.
Employees have long valued retirement benefits. Employers
have met this demand in essentially three ways: pay workers enough so that they
save on their own; organize a contribution-based benefit, where employees, and
often the employer, pay into a special retirement account owned and managed by
the employee; or promise to provide an employee a certain level of benefits upon
Public school teachers are able to choose between options two
and three. The bill considered by the House would have moved new school hires to
the defined contribution system, putting teachers in line with most other
According to 2005 data from the federal Bureau of Labor
Statistics, only 22 percent of private sector employees receive a defined
benefit plan for retirement. It’s easy to see why. No employer can predict the
future or realistically promise an employee, "If you stay with us through the
years, when you retire I’ll guarantee specific benefits for the rest of your
life." There are too many variables outside the employer’s control.
Knowing that, why would even 22 percent of private sector
employees find themselves in defined benefit plans? While the answer is
multifaceted, at least one thing is clear: union involvement is a factor. When a
private employer negotiates with a labor union, 73 percent of employees
participate in a defined benefit plan. In the nonunion private sector, only 16
percent of employees are covered by a defined benefit plan. According to the
Bureau of Labor Statistics, "The rate of access to defined benefit retirement
plans was almost five times higher among union than among nonunion workers."
As a result, firms with strong unions — General Motors and
Delphi are prime examples — are often saddled with expensive, unpredictable,
benefits that most other employers — Toyota, for instance — simply do not have
to contend with.
The uncertainty surrounding promised future retirement
benefits is not just an employer-employee problem. Should a company with a
defined-benefit plan become insolvent and file for bankruptcy, its retirement
obligations are often discharged. If the company has participated in the federal
program guaranteeing pensions — which is itself massively underfunded — then
taxpayers will be burdened with much of the cost. Likewise, should Michigan’s
teacher retirement benefits prove unworkable, it’s likely that the taxpayers
will be asked to pick up that tab as well.
A key facet of human reason is the ability to recognize signs
of danger. Consider how you would react, for example, if you were walking into a
forest thick with smoke, and if woodland creatures were rushing past you in the
opposite direction. Chances are that you are walking into a forest fire, and you
ought to change direction — quickly.
When it comes to defined benefits, corporations and
municipalities have seen the warning signs and are changing course to avoid
getting burned. Public school employee unions and their allies in Lansing would
be wise to do the same.
Thomas W. Washburne is director of labor policy for the Mackinac
Center for Public Policy.