It is often said that people need to pay higher taxes if they want quality government services. The connection doesn’t work quite that way, however, and the state’s pension mess demonstrates the point.
Ideally, when a government employee earns pension benefits, his or her employer sets aside money into the retirement system where it is invested, grows and pays for the employee’s pension when he or she retires. Setting aside the right amount of money puts the costs of today’s government onto today’s taxpayers. Underfunding the pension system pushes the costs onto tomorrow’s taxpayers.
There are few political incentives to make sure managers put in the right amount. Officeholders rarely get voted out of office if a gap in the pension system emerges. And underfunding it means they can spend more today on other priorities. That’s why nearly all open pension systems in Michigan are underfunded.
Theoretically, unions could be good watchdogs, but I just haven’t seen it play out like that here in Michigan. They seem more interested in keeping crazy pension rules rather than ensuring that their members’ retirement is secure.
But the past catches up. Today, the costs of paying down yesterday’s pension promises dominate government finances. Taxpayer payments into the state’s largest retirement system, the public school retirement system, increased from $1.1 billion in 2000 to $3.2 billion in 2017, more than doubling in cost when adjusted for inflation. And 90 percent of the payments go to catching up on underfunded benefits.
That makes government cost a lot, but the payments don’t go to pay for high-quality government services today. They pay for the costs of yesterday’s government.
East Lansing just became the first Michigan city in 24 years to pass an income tax, which cities in the state may do. City officials placed the measure on the ballot after city voters rejected a similar proposal last November. But in August, voters approved a different proposal. The extra money will go to the city’s underfunded pension system. This is speculation, but I will be surprised if the income tax goes away even if the city catches up on its pension obligations.
Few benefit from the current system. Workers don’t come out ahead when their pensions are underfunded. Residents see their money go toward the pension fund rather than better services. Unions lose out on members when cities use money for past debt instead of hiring more employees.
But things are changing. Michigan governments are converting their retirement systems from debt-ridden ones to 401(k)-style retirement plans. In a 401(k)-style plan, workers get money set aside into retirement funds that they control. Employees can sue their employers if their managers don’t put in what they promised, which is not true of pension systems. And a 401(k)-style plan stops taxpayers from getting fleeced.
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