Michigan House Republicans recently released a reform agenda that calls for closing the state-run school employee retirement system to new employees. Senate Majority Leader Arlan Meekhof, R-West Olive, reiterated the proposal.

The necessity of closing the current defined-benefit pension system and instead offering new employees a defined-contribution plan is simple: the state underfunds pensions.

According to the legislative auditor general, the system has been underfunded in all but one of the past 30 years. The system carries a $25.8 billion unfunded liability. Michigan taxpayers are now on the hook for 13 times more in unfunded school pension liabilities than the total amount secured by the faith and credit of the state taxpayer.

Not surprisingly, the underfunding caused the cost of the system to skyrocket. Retirement benefits now consume 34.54 percent of school payroll. Reports show that to eliminate the current unfunded liability the state would have to pay “catch up costs” starting at $1.9 billion per year and rising for the next 23 years. Even these large costs assume that benefits will not be further underfunded.

The system obviously puts taxpayers at risk, but future school retirees have the most to lose. Under the current system their economic security depends on the state continuing to make multi-billion dollar contributions over the next generation – a duty it has failed to adequately perform over the past generation.

Most of what is said by officials and politicians opposed to closing the current system are distractions that ignore the basic underfunding problem.

For example, it is claimed that a defined-contribution system would “cost more” than defined-benefit pensions. But if the state underfunds the current system, then the cost comparisons between the “normal cost” of defined-benefit plans (not counting catch up costs) and the employer costs for defined-contribution plans give misleading results.

Other questions raised about the system's influence on attracting quality employees, how to address “transition costs,” and market volatility are also important but miss the reason that pensions need to be reformed. Policymakers need to acknowledge the main problem of the pension system and be sure that they contain its ability to develop further unfunded liabilities. House Republicans and the Senate majority leader are right to make this a priority.

For more information, please see:mackinac.org/pension

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