$500,000 Retirement Nest Eggs Likely Under Teacher Pension Alternative

Like the current system, new one intended as a hefty supplement to Social Security

How deep in debt is Michigan’s public school pension system? For every dollar paid to a public school teacher, districts must deposit another 37 cents into the state-run system, mostly to catch up on the accumulated debt caused by years of pension underfunding.

Legislative leaders say it’s time to close the system and instead give new hires substantial contributions to their own retirement account or annuity. Mackinac Center analyst James Hohman ran the numbers on what their proposed alternative would mean for a new school employee who works for 30 years at an average district.

All new employees would automatically see an employer contribution of 4 percent of their salary going into a retirement savings account. The state would kick in up to 3 percent more to match employee contributions.

If money in an employee’s account were invested in a conservative, low fee target-date retirement fund that earned an average annual long-term return of 7 percent, today’s new hires would have $514,184 after 30 years. There are no guarantees, but since 1970 the Standard & Poor’s 500 stock index has returned an average compound yield of 10.3 percent, so this is not an unreasonable expectation.

Still, not every teacher may want this market exposure, and for those who don’t there would be another option: contributions to a self-funded annuity. The details aren’t finalized, but this would provide a guaranteed lifetime income stream (and like the current pension system, nothing for heirs).

Like the current defined benefit school pension system, the proposed alternative is intended to work with Social Security benefits to replace a good portion of a worker’s preretirement income. Unlike the status quo system, new employees would get to keep half the employer contributions after two years, and all of it after four years.

Under the current system, teachers who leave with less than 10 years of service get no pension and none of the employer contributions made on their behalf. That represents a full 56.6 percent of all Michigan public school teachers, according to a 2014 report.

Stay Engaged

Simply enter your email below to receive our weekly email:

Facebook
Twitter

A non-insurance based health care model called Direct Primary Care is gaining traction in Michigan because it saves money and provides better access to doctors.

Related Sites