Michigan lawmakers are at it again. During last year’s lame duck session, legislators in Michigan attempted to force through a bill to close the pension plan for teachers and public school employees – the Michigan Public Schools Employee Retirement System (MPSERS). They ended up dropping the bill due to a strong backlash from working families across the state. Now, they are trying, again, to do the exact same thing. Michigan should already know, though, that closing a pension plan decimates retirement security for public employees and increases costs for taxpayers.
In 1997, Michigan closed the Michigan State Employees’ Retirement System (MSERS), the pension plan for state employees. All new hires were forced into a 401(k)-style retirement system. Twenty years later, the employees participating in the new 401(k)-style plan are falling behind in saving for retirement. In January, the Michigan Office of Retirement Services reported that the median account balance for employees in the 401(k)-style plan was $37,600 total. This falls far short of what these working men and women will need to retire with security and dignity.
In addition to severely undermining the retirement security of state employees, closing MSERS also dramatically increased costs for the state and taxpayers. As the following chart shows, employer contributions to MSERS have risen sharply, from $145 million to $750 million, in the years since the plan was closed to new hires in 1997. This has occurred even as the payroll base has declined by more than $1 billion. Closing a pension plan does nothing to eliminate an unfunded liability, so the state still has to pay off that existing liability. Without new employees paying into the pension fund, the system must switch to more conservative investments that earn lower returns.
Pension funds succeed because they can invest on an infinite time horizon. With new employees constantly joining and paying into the system as older employees retire and begin to withdraw benefits, pension funds can balance risk and reward in their investments and create an optimal investment portfolio. However, when the plan is closed, there are no new employees paying into the system. Eventually, the number of retired employees withdrawing benefits begins to dramatically overwhelm the number of active employees continuing to pay into the system. This undermines the ability of the pension fund to invest ideally. This is why Michigan’s costs have skyrocketed, even though no new employees have joined MSERS in twenty years.
Closing MPSERS would be repeating the same mistakes that were made when MSERS was closed. Significant reforms were made to MPSERS several years ago when the plan was changed from a purely defined benefit model to a hybrid defined benefit-defined contribution model. Michigan legislators should allow those changes to take effect and start to work, rather than taking an unnecessary vote to undermine retirement security for teachers and increase costs for taxpayers.