Michigan Pensions Good at Controlling Fraud

In yesterday’s Wall Street Journal, legal reformer Philip K. Howard highlighted strident examples of government employees defrauding their pension systems. Thankfully, Michigan’s state retirement benefit systems have been remarkably free of such problems. It’s a testament to appropriate policies and decent administration. Nevertheless, while the state is good at preventing outrageous abuses, it needs to fix a system that still imposes outrageous costs on taxpayers.

Pension plans typically offer benefits to employees who become disabled, providing income security to workers no longer unable to work. These benefits usually include pension enhancements or looser vesting rules. The extra expenses are simply tacked on to the overall system cost, and paid through employer or employee contributions.

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Mr. Howard’s op-ed described two plans in which the majority of employees retired under their systems’ disability rules — more than 90 percent of Long Island Rail Road workers and 82 percent of senior California state troopers.

In Michigan’s two largest state pension systems, however, only 9,230 of the 238,184 retirees and beneficiaries, about 4 percent, are classified as disabled, according to the state’s actuary reports.

The Michigan systems remain in trouble, however. The state owes $21 billion in unfunded pension liabilities, an amount that spiked $6.6 billion just since last year. In addition, current retiree health care expenses paid by these systems on a “pay as you go” basis cost $1.1 billion in 2010; the state has not saved a penny to provide for future retiree health benefits.

Reform, however, is in sight. The Michigan House has already passed a bill that phases out retiree health care benefits for new employees. State employees hired on or after March 31, 1997, already participate in a 401(k) plan instead of the conventional pension system. These reforms should be extended to the state-managed school retirement system, too. In addition, legislators should also explore trimming back retiree health benefits for current employees as well, which would go a long way toward bringing benefits in balance.

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