Michigan Pension Underfunding Gaps Widen

As Michigan legislators debate whether to close the teacher pension fund, a new report on the state’s other major employee pension system — the state employee fund — warns about the need to close the system.

Even though policymakers closed the state employee retirement system to new hires in 1997, thousands of employees still participate in the defined-benefit system and tens of thousands receive benefits. The state has only 61 cents saved for every dollar of benefits earned by members and retirees.

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This $4.1 billion gap would likely have been much higher had the state not closed its system. A 2011 study showed that taxpayers have saved between $2.3 and $4.3 billion in these unfunded liabilities.

The unfunded liability is the difference between the actuarial value of assets and that of liabilities. Though the plan is closed, the state is still adding long-term liabilities, meaning that the pensions being earned by current workers are larger than the amounts being retired. Liabilities grew by $737 million, from $14.9 billion in 2010 to $15.6 billion in 2011.

The actuarial value of the investments used to pay for this growing obligation fell by $560 million, from $10.8 billion to $10.2 billion.

Running a pension fund is a risky financial commitment. Even after choosing to wind down participation in the program, problems can develop decades after the decision. But the major underfunding problems developing in these pension funds are all the more reason to close them to new members.