News Story

A Third Of New School Hires Choose 2017 Reform’s Traditional Pension Option

But new employee burden sharing requirements make repeat of old system’s underfunding less likely

Two-thirds of school employees hired since Feb. 1, 2018, have chosen to enroll in a 401(k) account with substantial employer contributions rather than a traditional defined benefit pension with greater employee cost-sharing provisions. The either-or option was part of an overhaul to the school retirement system that lawmakers enacted in 2017. Among other things, the reform made the 401(k) defined contribution option the default pick for new employees.

When the new system was adopted, pension officials and fiscal analysts acknowledged they could not predict how many new employees would choose either option. If a high number of higher-paid school employees choose the traditional defined benefit option, it could have an impact on the system’s future “cash flow and liquidity needs,” the state Office of Retirement Services said at the time.

So far, there have been 8,546 new members of the Michigan Public School Employees Retirement System since Feb. 1, 2017. According to the state retirement office, 67 percent of them have picked the defined contribution 401(k) plan over the defined benefit option that provides an annual pension.

According to a 2014 report cited in a 2017 Michigan Captitol Confidential story, 56.6 percent of school employees who enrolled in the defined benefit pension option do not collect a pension, because they do not put in the 10 years of service required to vest in the system. This vesting requirement remains in the new system.

Even if the revised defined benefit option does create cash-flow problems, however, increased employee burden-sharing provisions make it unlikely that the result will be the very large unfunded liabilities that characterized the previous system. That underfunding was the product of politicians and state officials chronically failing to make adequate deposits. The resulting debt exceeded $29 billion when the new system was adopted, and it provided the rationale for making the change.

For seven consecutive years, from 2010 to 2016, officials had failed to contribute the full amount to the pension fund that accounting rules required in order to catch up on past failures to adequately fund the system.

The costs incurred by those failures have devastated school budgets. For example, the Dearborn Public Schools paid $41.2 million to the Michigan Public School Employees Retirement System in 2018, or $25.1 million more than its 2009 contribution of $16.1 million. To put that in perspective, if the 2018 costs had been the same as they were in 2009, the one-year savings would have been enough to give each of the district’s 1,508 teachers a $16,600 bonus last year.

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.