This week the Michigan state legislature began its 2016 legislative session. As legislators there consider how best to provide retirement security to public employees, it’s important to look back on Michigan’s history. In 1997, Michigan closed its defined benefit pension plan for state employees and forced new hires into a defined contribution 401(k)-style system. The results were not good.
Closing the Michigan State Employees’ Retirement System was pitched as a cost-saving measure for the state. As has been the case in other states, however, closing the defined benefit pension plan actually increased costs for the state. It also severely weakened retirement security for state employees.
When MSERS was closed in 1997, it was actually overfunded at 109 percent of assets. Fifteen years later though, the plan was underfunded at 60 percent. Without new participants paying into the system, the assets dry up, especially when the state does not make its annual required contribution to the pension system. Again, this has happened in other states: when a pension plan is closed, the unfunded liability actually increases, leaving taxpayers on the hook.
Not only did closing MSERS fail to save the state money, but it weakened the retirement security of state employees by forcing them into an inadequate defined contribution 401(k)-style system. According to a 2014 report, the average balance in the Michigan defined contribution accounts was just $30,021. Michigan’s public employees would have been better off in a defined benefit pension, which is worth at least 22 percent more than an ideal defined contribution plan, but the state would also have saved more. Defined benefit pensions are more cost efficient than defined contribution plans, typically offering the same level of retirement benefit at almost half the cost.
As Michigan legislators resume their important work this week, let’s hope they learn from the mistakes of the past so they do not repeat them in the future. Defined benefit pensions provide a greater amount of retirement security to public employees at a lower cost to the state. Abandoning pensions is a recipe for disaster.
