Pension Protestors Should Be 401(k) Supporters

Offering 401(k)-style benefits is good for teachers and taxpayers alike

Taxpayers are paying $2.5 billion more each year than they should for state-mandated school employee pensions. Lawmakers are getting heavy pushback on a bill that would fix this over time. The people that are fighting against this should actually support the effort.

The reason that this pension system is so expensive is that government officials have promised benefits and pushed the costs onto future taxpayers. And those costs have piled up: Taxpayers put $3.2 billion into the system last year. Roughly one out of every seven dollars spent on education in Michigan is spent on the pension system.

Of those costs, 89 percent are not for paying for benefits earned by people working today but rather to catch up on promises made in the past.

That’s not right. Pensions are intended to be prefunded — when an employee earns a pension, the employer is supposed to set aside money to pay for it. The money gets invested, grows, and is used to pay the worker’s pension once retirement comes.

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But government pensions don’t get funded, they get underfunded. The pensions earned by employees will cost $72 billion, according to state estimates. The fund managers have only saved 60 percent of that, leaving a $29 billion gap.

That’s why benefits are so expensive even if they are not especially generous. Lawmakers requires high employee contributions to pay for pensions. It takes 10 years to earn any pension at all, and roughly half the teachers won’t make it that long.

Nevertheless, the plan is expensive due to underfunding. It costs taxpayers 37 percent of employee payroll.

Offering new employees a defined contribution, 401(k)-style retirement system would stop the state from being in this situation over the long term. With a defined contribution approach, lawmakers cannot promise benefits now and pay for them later. The plan under consideration in Lansing would cost taxpayers a maximum of 9 percent of payroll with retiree health care benefits included. That is an improvement, but still high by private sector standards.

The state could save up to $2.5 billion per year when compared to the current costs of the underfunded pension system, perhaps even more if the funding gaps in the legacy plan continue to increase.

Yet even with this savings, the proposed plan would be more generous than the so-called hybrid pension new school employees are set to receive now. Under the current plan, employees put up to 6.4 percent of their payroll and employers put in 3 percent. The proposed plan requires less of employee contributions and more from employers, with 4 percent coming automatically from employers and a dollar-for-dollar 3 percent match available for employees. (Additional retiree health benefits would stay the same.)

An added benefit is that containing the ability to rack up further unfunded liabilities protects the workers in the older system. The ever-inflating unfunded liabilities have caused employers to negotiate salary concessions, and at some point they can jeopardize the solvency of the plan.

That’s why offering new employees 401(k)-style benefits is good for teachers and taxpayers alike. It’s good to see the Legislature considering this.

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