School retirement system continues to harm members
By James Hohman
At Michigan Radio,columnist Jack Lessenberry thinks that new school employees should continue participating in the state’s grossly underfunded retirement system.
It’s better for teachers to have an employer-sponsored pension income, he says, than employer-sponsored retirement savings accounts.
But the system he supports hurts the very people he thinks it helps.
It’s important to remember that public school employees must work for 10 years before they “vest,” or have a right to receive a pension. If they leave before then, they won’t get a pension. And roughly half of Michigan’s public school employees do just that.
If, though, they had been in a 401(k)-style system, they would have built up savings they could take with them when they go. Add in investment earnings and the savings become larger. So which scenario is better for these teachers who leave before vesting: no retirement benefits, or a personal account with real dollars in it?
When it comes to funding the pension system, the state has had to make a number of assumptions, and it’s gotten many of them wrong. As a result, the system has only 60 cents for every dollar it is obligated to pay. Apply that gap to all the teachers and other school employees who are counting on a pension and you have a shortfall of $26.7 billion.
When an employer makes deposits into a well-run pension system, it is setting money aside for upcoming obligations. But with Michigan’s school pension system, 89 percent of the deposits simply pay down obligations already on the books. Instead of setting aside for the future, the system is trying to play catch-up.
The costs of having an underfunded pension system are real. Each year, schools have to pay more and more money for pensions. Schools had to put 13 percent of their payroll into the pension system in 2004; this year, it’s 37 percent.
This skyrocketing cost is prompting districts to lay off teachers. Other teachers have kept their job but have endured pay freezes or even pay cuts. It’s all happening because the state is in effect taking money from today’s classroom to make up for failing to fully fund pensions yesterday.
Imagine what would happen if, every year, your employer put an amount equal to one-third your salary in a retirement savings account of your own. Even if you took the most cautious approach to investing that money, you would soon have a healthy nest egg.
Instead of having that happy scenario, though, Michigan’s school employees face something else. They are in a pension system so broken that it costs more than one-third of their salary — and it still can’t provide basic retirement benefits to more than half its members.
As I wrote in The Detroit News, “The problem with government pensions boils down to a simple issue: The state promises something now, but pays for it later.” The state either needs to fix its funding assumptions and put more cash in the retirement system or it needs to move to a system — the government equivalent of a 401(k) plan — that doesn’t allow it to defer retirement expenses.
The current policy is hurting teachers and taxpayers alike.
James M. Hohman is assistant director of fiscal policy at the Mackinac Center for Public Policy, a nonpartisan research and educational institute dedicated to improving the quality of life for all Michigan residents by promoting sound solutions to state and local policy questions.