Michigan’s school pension system has $26.7 billion less than what it needs to fulfill the payments promised to current and future retirees, jeopardizing the futures of children, taxpayers and members of the pension plan.

So was the message of analysts from the Mackinac Center for Public Policy as they spoke with reporters and lawmakers this month. The Legislature has been considering Senate Bills 102, 1177 and 1178 to address the growing unfunded pension liability by moving future hires to a defined contribution – versus a defined benefit – plan like those most people in the private sector enjoy. Current teachers and those who are already retired would not be affected by the change.

“We need to do something to close the system so that we're not going to continue to rack up these unfunded liabilities,” James Hohman, assistant director of fiscal policy, told MLive.

The problem is a simple one, Hohman told Interlochen Public Radio.

“The state’s defined-benefit pension plan has been mismanaged for a generation. They continue to promise benefits now and have future taxpayers pay for it.”

Unfortunately, lawmakers heard a misleading analysis by the state’s Office of Retirement Services, which incorrectly claimed it would cost hundreds of millions of extra dollars to pay down the existing unfunded liabilities and move future hires to defined contribution plans. Hohman explained the issue in an op-ed published by The Detroit News.

But such funding decisions are fundamentally up to policymakers. And one of the costs raised by the state were explicitly avoided in the legislation they were considering.

Moreover, there is a bit of irony in getting lecture on fiscal prudence from the people that accidentally made school employees the state’s largest creditors.

Lawmakers shouldn’t let such claims stop them from approving this plan. Governments can help employees save for retirement by providing matching contributions to retirement accounts owned by the workers themselves. It’s better for both employees and taxpayers when retirement benefits are paid when they are earned. This reform will finally contain Michigan politicians and pension fund managers from continuing to dig a deeper fiscal hole that taxpayers will eventually have to fill.

Taking action to control the growing debt of the MPSERS will deliver huge dividends in the long run, Hohman told MLive in another article.

Containing the ability to rack up this unfunded liability is going to be huge. This is the biggest debt the state has. This will have a huge financial consequence over the long term.

In an editorial, The Detroit News noted, “The Mackinac Center for Public Policy has also taken the lead on teacher pensions, and has offered detailed reports and research to help lawmakers.” It said pension reform must be a legislative priority in the coming year and urged teachers to join the effort to create a more sustainable model.

Read the first MLive article here.

Read the second MLive article here.

Read the op-ed in The Detroit News here.

Listen to the interview with Interlochen Public Radio here.

Read the editorial in The Detroit News here.

Permission to reprint this blog post in whole or in part is hereby granted, provided that the author (or authors) and the Mackinac Center for Public Policy are properly cited.