News Story

Dear Teachers Union: School Pensions Not Supposed To Be A Ponzi Scheme

Says so right in the state constitution

A story in the Detroit Free Press described why the state’s largest teachers union thinks the underfunded school pension must keep enrolling newly hired employees: If new people are not enrolled in the system, then “new teachers won’t be contributing anything into the existing pension system for older and retired teachers.”

The newspaper spoke to Doug Pratt of the Michigan Education Association. Like many, Pratt appears to believe that the pension system is supposed to run like a giant Ponzi scheme, where payments to earlier entrants require fleecing a steady stream of new “marks.” The misunderstanding is understandable — this is how the federal Social Security system is run — but it’s still incorrect.

ForTheRecord says: The reason Ponzi schemes are illegal — and the reason the Michigan Constitution prohibits using that model for government pensions — is that the racket eventually runs out of new marks to fleece.

In reality, each employee’s future pension benefits are supposed to be fully paid for in the same year they are earned. “Paid for” means the employer and employee both contribute enough each year so that over several decades the pension fund’s investments grow enough to cover the individual’s pension checks.

This means that even if the employer never hires another person, money already in the pension fund is supposed to cover all the promises made to all the system’s existing members. Properly managed pension systems do not require a fresh stream of new entrants to work. And new entrants don’t help a system when it is underfunded.

Unfortunately, the state has failed to adequately fund the school pension system, resulting in its current $26.7 billion shortfall. But alas, paying off that debt requires more taxpayer cash, not more school employees.

“Catching up” on that underfunding will take years, but in the meantime, two things are clear:

First, new employees should not have their own pension contributions looted to cover pension promises made decades ago to current employees and retirees. Nor does the system require new employees to pay for current of future pensioners.

Second, going forward, the state should stop digging a deeper hole. It can do this by no longer promising lifetime benefits from the broken system to every new teacher who is hired. That is what the Michigan Legislature is expected to debate in the current lame duck session.

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.