The school pension system is in dire need of reform. It owes school employees and retirees $26.5 billion — 13 times more than the state owes its general obligation bondholders. Yet some policymakers think that they have already solved the problem with changes to the system made in 2010 and 2012. What has happened since shows why the state needs to get out of the defined-benefit pension business entirely.
Back in 2012, legislative fiscal agencies modeled what would happen to contribution rates — the percentage of schools’ payroll required to meet the costs of the system — with and without the reforms. They predicted that contribution rates would be 30.5 percent of payroll this year after the reforms.
Current rates are 36.3 percent of payroll, 19 percent higher than projected. And higher than fiscal agencies predicted they would be even without the 2012 reforms.
These projections for the Michigan Public School Employees Retirement System went off the rails quickly and have underestimated real contribution rates since 2014.
The difference is caused by what we told them at the time: defined-benefit pension plans don’t get funded, they get underfunded.
The projections used by the legislative fiscal agencies assumed that the system would not develop any further unfunded liabilities. This was inaccurate. The system developed another $2.2 billion to the difference between what it has saved and what it has promised to pay out.
Underfunding the school employee pension system does a disservice to teachers, school boards and taxpayers alike. The state has failed to demonstrate that it can capably manage a large defined-benefit system, failing time and again to accurately project the real costs and to adequately pay those costs. That is why Michigan politicians ought to convert the system to a defined-contribution plan one where teachers are paid with real money rather than promises, and the costs to taxpayers are clear, transparent and controlled.
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