Snyder Signs Michigan Teacher Pension Reform Into Law

Commentary

Snyder Signs Michigan Teacher Pension Reform Into Law

Michigan’s Gov. Snyder has signed into law a first-of-its-kind, innovative pension reform bill that will provide a new set of retirement choices for state teachers and cap the growth of liabilities in the state’s current, structurally flawed retirement plan. The Michigan Public School Employee System (MPSERS)—currently only 60% funded with $29 billion in unfunded pension liabilities—now has its most realistic path to solvency in the past two decades.

As I wrote last month with my colleagues Len Gilroy and Daniel Takash, “the reform is grounded in a focus on reducing risk, while stabilizing cost, and preserving choice:

  • New hires will be auto-enrolled in a defined contribution retirement plan (DC Plan) that has a default 10% total contribution rate. DC Plans inherently have no risk of unfunded liabilities, and the maximum employer share for the plan (7%) is less than what employers should be paying for the current plan.
  • However, if new teachers would prefer a defined benefit pension plan (DB Plan), they will have the choice to voluntarily switch to a new “hybrid” plan that, unlike the current “hybrid” plan offered to teachers, uses very conservative assumptions and short amortization schedules and splits all costs 50-50 between the employee and employer.
  • Uniquely, the hybrid plan will have a safeguard mechanism that would trigger closure if the funded ratio falls below 85% for two consecutive years.
  • And to top it off, the reform design improves certain actuarial assumptions and infuses the plan with $250 million in additional contributions to chip away at the pension debt.”

To be sure, elements of the Michigan teacher pension reform can be found in other retirement system changes in other states. But no state in the country thus far has embraced the full scope of these reform components for a teacher pension system in a way that will virtually eliminate the possibility of unfunded liabilities for new hires, while also allowing future teachers a choice of retirement benefit styles (DB or DC).

Some other plans in the country have adopted similar components as the Michigan teacher pension reform:

  • Florida moved to default employees into a DC Plan earlier this year.
  • Pennsylvania overhauled its retirement benefits earlier this month by giving new hires a choice between two hybrids or a DC Plan.
  • Arizona has embraced 50-50 cost sharing for its public safety, state employee, and teacher defined benefit plans.
  • South Carolina changed its funded policy to increase employer contribution rates by 100 basis points a year until 2023.
  • And Kentucky’s state and local pension system moved to adopt a very conservative 5.25% assumed rate of return last month.

The structure of this blended approach should serve as a model for teacher pension reform in other states facing similar challenges as MPSERS does today.

Read our whole story on the Michigan teacher pension reform effort here.

Read our comments in the Detroit News on how the reforms will be good for teachers here.

Read our testimony on the merits of the Michigan teacher pension reform effort here.

Anthony Randazzo

Anthony Randazzo is a senior fellow at Reason Foundation, a nonprofit think tank advancing free minds and free markets.