Last winter, I wrote about an effort in Michigan to reform the state's teacher retirement plan. At the time, Republican lawmakers were pushing to close the state's defined benefit pension plan to new workers and instead enroll all new teachers in a defined contribution plan identical to the one offered to other state employees.
In anticipation of a similar bill coming up again this year, we created a Michigan-specific version of our 3-minute pension "explainer" video. If you want a simple, easy way to quickly understand the debate over pensions in Michigan, you might start with the video below:
As fate would have it, the story we articulate in the video is now playing out in Michigan. Legislators continued to push for reform, and this week they agreed on a new version of the bill. It would set a portable defined contribution plan as the default, but it would also allow teachers to opt-in to a pension plan if they chose to. The authors of the bill argue it would be better for teachers and taxpayers, but Michigan union groups are attacking the bill as being anti-teacher.
Who's right? Well, consider how bad Michigan's plan is today. In a report released this week, we analyzed every state's teacher retirement plan. Along with most other states, Michigan earned an "F" grade. Here are the basic stats:
- Only about half of all incoming teachers will stick around for 10 years, the minimum required to earn a pension;
- Less than one-in-ten young teachers will teach in Michigan for their full career and reap the large back-end benefits promised to them;
- The current "hybrid" plan is dominated by its defined benefit component, and it has no way to keep costs in check over time if its assumptions prove inaccurate; and
- Michigan districts are currently contributing about 22 percent of each teacher's salary toward the pension plan, but most of that is being used to pay down past debts, not to pay for actual teacher benefits. In fact, about 80 percent of school district contributions toward the pension plan today are going to pay off past debts, not as benefits for current workers.
Combined, this leaves Michigan teachers in an expensive, back-loaded system. The vast majority are losing out in terms of retirement benefits, and all of them are losing out because their employers have to keep paying down pension debts.
The new legislation won't solve the state's existing debt problems, but it will prevent the state from accruing new debts in the future. And more importantly, it will enroll new teachers in a portable defined contribution plan, with a shorter vesting period and more money going toward teacher retirements. That will cost the state more money, but it's a win for teachers.