Michigan Pension Fund Shortfall $11.5 Billion, Not $51.3 Billion

News reports often refer to the larger figure in the headline as the amount of underfunding in Michigan state and school employee pension funds.

However, the figure includes not just pension liabilities, but also future retiree health benefits, which according to a recent Michigan Supreme Court case are not considered an enforceable obligation on the state and its taxpayers. When the amount not set aside for these non-obligations is removed, the actual retirement benefit obligation pre-funding shortfall is $11.5 billion.

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Here are the actual numbers, as reported in a recent Pew Center on the States paper:

Some $58.8 billion has been set aside in state pension funds to pay the cash-portion of future retirees' benefits. The projection for "actuarially required contributions" needed to fully cover the liability is $70.3 billion. The shortfall is thus $11.51 billion, or 16.3 percent.

In contrast, less than $1 billion has been set aside for the health care non-obligations (also called "Other Post-Employment Benefits" or OPEBs). Fully funding these would require setting aside another $39.8 billion. However, under current law the state can alter the benefits at will, so the amount actually collected by retirees could be far lower.

The validity of this non-obligation status is indicated by several recent events. First, earlier this year, as part of a modest pension reform package, Gov. Jennifer Granholm proposed eliminating a portion of the benefits for current school employees after they retire.

Also, in the legislative bargaining over the school portion of the reform package, the Democratic majority of the House - acting as an agent of the MEA union according to Senate Majority Leader Mike Bishop - tried to get provisions added to the legislation establishing that the health benefits really would be obligations. If the union had thought that they were already obligations, it would not have perceived a need to give up other potential benefits in return for this one.

What does it mean for retirees if these benefits are not binding obligations? The extent of the coverage could be limited, greater co-pays could be required, or the benefit could be eliminated altogether.

This is less radical than it sounds, however: Members of the retirement system all get Medicare at age 65 just like the rest of us, so there is no risk that these individuals will be without health care in their old age. Michigan State University recently eliminated such benefits for new hires, reportedly the last Big Ten school to do so.

As for those who would like to retire in their 50s with full health care coverage, it's likely most Michigan residents who are non-government employees would not find the elimination of that option to be an unreasonable hardship. The Lansing State Journal opined recently that people of working age should not be collecting full health benefits unless they are working.