Editorial

Pension Debt ‘Like a Mortgage?’ Yeah – On a Home You Sold Years Ago

Shakiest cover story yet from defenders of unsustainable government pensions

The upcoming lame-duck legislative session may see a push to reform the state’s notoriously underfunded school and municipal pension systems. As usual, some beneficiaries of the current system are circling the wagons to preserve the unsustainable status quo.

Which beneficiaries? Not current or future retirees — their benefits are guaranteed by the state constitution. No, it’s the bureaucrats who manage these systems. Their jobs become less important if the systems get smaller as new employees are no longer enrolled in them — exactly the reform under consideration.

Pension officials may want to reexamine one new line of defense, though, which compares massive and growing government pension liabilities to a homeowner’s mortgage. That’s the pitch sent by Chris DeRose, CEO of the Municipal Employees' Retirement System of Michigan, in a letter to the editor of Crain’s Detroit Business:

“Yes, pension unfunded liabilities exist; however, having unfunded liability is like having a mortgage. In our 70-year history, our municipalities have made their ‘mortgage’ payments every month while prefunding a portion of their entire mortgage. While paying off the entire mortgage might be desired, having a mortgage is not a crisis.”

ForTheRecord Says: Unfunded pension liabilities are indeed similar to having mortgage debt — on a home you sold and haven’t lived in for 25 years.

Every year, hundreds of millions of Michigan taxpayer dollars go to cover unfunded pension liabilities accrued on behalf of employees who in many cases stopped working decades ago. This happens despite a state constitutional provision that explicitly requires governments to fully fund employees’ future pension benefits in the year they are earned. The rationale, based in prudence and sound moral judgment, is that the benefits should not become a burden on future taxpayers.

These officials have failed in their responsibilities. For example, in 33 of the past 34 years, the people who manage this state’s largest government pension system — the one for school employees — have failed to maintain a pension plan that saved enough to pay the benefits earned by workers. The inevitable consequence is the system’s current $26.7 billion unfunded taxpayer liability.

Yet government pension managers here and elsewhere have sandbagged reform efforts by spreading tales of mythical “transition costs” and other objections.

Apparently, that cover story has worn thin with lawmakers, which may explain the new story, the mortgage analogy. The officials would do better to accept their share of the blame for saddling taxpayers with billions of unfunded pension debt. Their next step would be to get on board the one reform that’s guaranteed to eventually cure the problem: Stop enrolling new employees in these legacy systems.

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.