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The most important public policy question in Michigan is what to do about retiree benefits. The amount of debt owed to public employees at the state level, in the education system and at the local level is astounding — tens of billions of dollars governments have promised but failed to set aside.
Pension systems across Michigan are facing a crisis that threatens workers, retirees, businesses, taxpayers and residents. Their costs are already crowding out the public services citizens rely on most, like spending on roads and transportation, schools, parks, public safety and more.
For decades, state and local elected officials — Republican and Democrat — have promised billions more in pensions than they have saved to pay for them. And despite now spending an extra $1 billion more than the state did just five years ago, policymakers still aren’t making the full payment required to pay the estimated costs of the Michigan Public School Employee Retirement System, the largest pension system. This repeated underfunding has led to large liabilities that will require severe cuts to public services.
MPSERS is underfunded by $26.7 billion, meaning only 60 percent of the money needed to meet its commitments has been set aside. It now gobbles up 36 percent of school payroll costs, often limiting teacher wage increases and compelling cuts to other school services.
Local governments are just as bad. Almost none of the largest municipalities in Michigan fully fund their pension system, with the average city funded at only 67 percent. Retiree liabilities have contributed to the fiscal crises in Detroit, Flint and elsewhere.
It’s time for a change. Although MPSERS continues to accrue debt, in 1997, Michigan reformed its state employee pension system by shifting new workers to a 401(k)-style, defined contribution plan. This has saved up to $4 billion and capped the state’s liability, meaning Michigan is on pace to eventually pay off its liabilities from this system. This isn't radical. Almost every private sector worker has long been shifted off defined benefit plans and onto defined contribution accounts. States around the nation are shifting away from unsustainable pension systems and toward better plans.
The Mackinac Center has conducted research showing how big the problem is. We’ve spoken with public employees (many of whom prefer a defined contribution plan), met with legislators and worked with coalition members who support reform. We’ve had a good response. Public employees across the state have told us they want the Legislature to protect the pension promised to them. Local municipalities are working to reform their systems. The Legislature is considering measures to close the teacher pension system and make other reforms.
Shifting new employees to a defined contribution plan and requiring local municipalities to do the same will protect the pensions of current retirees and workers — promises we must keep. This ensures fairness to workers by preventing the state from underfunding going forward, helps prevent cuts to basic government services by schools and municipalities and saves future taxpayers from having to pay the costs of previous generations.
To learn more about pension reform, visit mackinac.org/pension.
