Teacher Pension Underfunding Hits $22B

The new actuary report on the school employee pension fund shows that the state has a $22.4 billion gap between what it has saved for school employees’ retirement and what workers and retirees have earned.

That is a $4.8 billion increase from last year. All told, the costs to catch up on this underfunded system represent nearly $6,000 per Michigan household.

This is not a one-year issue. Last year’s reports show that the school employee and state employee pension funds' unfunded liability grew by an additional $6.6 billion.

The gap in the school retirement system does not have to be paid all at once, but it does have to be paid down over time. The benefits are constitutionally protected promises to school employees, after all. The state assesses these costs to employers as a percentage of payroll of the members in the system. These payments to catch up on underfunding cost 12.49 percent of payroll and are expected to increase to 16.24 percent of payroll.

Add to these rates the payments to prefund pension benefits earned by members in the current year and the payments on retiree health insurance also assessed as a percentage of payroll and the costs are expected to exceed 30 percent.

This is an incredible expense, especially considering that private-sector benefits for full-time employment are around 5 percent to 7 percent of payroll.

The Michigan Senate voted to close the pension system to new members and instead offer them a defined-contribution retirement system whose costs would not exceed 7 percent, and would prohibit the state from developing unfunded pension liabilities for members in the system.

The House has pushed back and instead made the defined-contribution plan optional, citing $1.4 billion in “transition costs” if the plan was closed. These “transition costs” represent a completely optional cost, however.

But as the growing unfunded liabilities show, the potential for unexpected and substantial unfunded liabilities far exceed the phantom “transition costs.”

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.