A news service for the people of Michigan from the Mackinac Center for Public Policy

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Are Early Retirement Incentives A Good Deal for Cities?

Not with defined-benefit retirement plans

Michigan Radio reports that the City of Kalamazoo saved $7 million by offering an early retirement incentive to workers in 2012. The figure is fictitious.

The city simply shifted costs from current operations to its pension fund, and not at a savings, either.

Early retirement incentives boost employee's future pension payments in exchange for leaving the city's workforce prematurely. Employees near retirement age tend to have the longevity and experience that make them cost more than their younger colleagues. As these costlier employees are replaced by cheaper, younger workers the city's operating funds save some cash.

This calculation, however, ignores the long-term cost of increasing future pension payouts. According to its annual actuarial report, Kalamazoo's incentive actually cost taxpayers $27 million in long-term liabilities.

Kalamazoo is rare among municipalities in having an "overfunded" pension system (excluding optional retiree health care benefits). The city has not had to make pension contributions since 1997. But six years in which actuarial returns on pension fund investments failed to meet projections have depleted that margin. The total liabilities of the system have increased by roughly $80 million in that time, while pension assets have gone sideways.

Defined benefit pension funding is an inherently risky business, and early retirement stacks the odds a little more against future taxpayers. When city managers boast about short-term savings, taxpayers should remind themselves there's no free lunch and take the claims with a grain of salt.

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See also:

CapCon Pension Coverage

Teacher Pension System Hole Getting Deeper

Meet James Hohman, Assistant Director of Fiscal Policy at the Mackinac Center. James discusses his latest project, an analysis of Proposal 1, the proposal on personal property tax reform that will appear on the August 5th ballot. Read more about Proposal 1 here: http://www.mackinac.org/20246


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