Michigan’s Pension Reform Experience

by Eileen Norcross on October 26, 2010

in State Policy

In 1997 Michigan undertook a significant though incomplete reform of its public pension systems. The legislature closed Michigan State Employees’ Retirement System (MSERS) to new hires and established a defined contribution plan for public sector workers, shifting risk away from the taxpayer. Pre-1997 workers remain in the defined benefit plan and MSERS’ liability is scheduled to be paid off by 2037.

This pension reform was not comprehensive. The Michigan Public School Employees’ Retirement System (MPSERS) was left untouched and continues to operate as a defined benefit plan. A study by Richard C. Dreyfuss of the Mackinac Center estimates, based on the state’s assumptions, that the unfunded liabilities for pension and health care benefits for Michigan’s public school teachers range between $28 and $39 billion. This estimate is based on the state’s assumed rate of return on assets of 8 percent. In other words, the total is far higher than this study suggests.

In the meantime employee benefit costs are rising in school budgets. For every $1 the school district pays a teacher it must give $0.20 to MPSERS.

Mr. Dreyfus writes Michigan’s successful 1997 reform of MSERS is a “case study for the state” and although savings from moving teachers to a defined contribution plans will not be realized in the short-term the long-term policy outcome remains the same. Shift risk away from the taxpayer and establish a predictable and affordable retirement system for public sector workers.

  • Richard Vandenbrul

    I was involved with many DB conversions and freezing of these plans in 1993-1995. Several Michigan Counties installed 401(a) Money Purchase plans for new hires while freezing their DB plans. A few cities followed. More needs to be done. DB’s continue to be terminated or frozen in the private sector. I have also worked on freezing DB plans in the Credit Union industry.

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