Snapshot of Teacher Retirement
Michigan Public School Employees Retirement System
Pension Plus 2
Teacher Contribution Rate-DB Portion: 6.2%
Employer Contribution Rate-DB Portion: 6.2%
Teacher Contribution Rate-DC Portion: 4%
Employer Contribution Rate-DC Portion: 3%
Vesting Period-DB Plan: 10 years
Participation in Social Security: Yes
How Does Teacher Retirement Work in Michigan?
In Michigan, teachers are part of the Michigan Public School Employees Retirement System. The MPSERS was founded in 1945.
New teachers in Michigan have choices about which state retirement plan to participate in. As of February 2018, they are automatically defaulted into the Defined Contribution (DC) plan unless they make an affirmative decision to join a plan known as Pension Plus 2. (Workers hired before 2018 may be enrolled in the original Pension Plus plan, which has slightly different rules.) Pension Plus 2 is a hybrid plan which combines elements of both a defined benefit (DB) pension plan and a DC plan.
The DB portion of the hybrid plan is structured similarly to that of other states. Unlike other retirement funds, a teacher’s contributions and those made on their behalf by the state or school district do not determine the value of the pension at retirement. Although those contributions are invested in the market, any individual worker's retirement benefits are not derived from the returns on those investments. Instead, those are determined by a formula based on the worker's years of experience and final salary.
How Does Michigan's Pension Plus 2 Plan Work?
Teachers participating in the Pension Plus 2 program contribute 6.2 percent of their salary annually to the DB component of the plan. Their employer matches that 6.2 percent. As with the Pension Plus plan, teachers in the Plus 2 program contribute 4 percent each year to the DC portion of the plan. Of that contribution, 2 percent goes toward their Personal Healthcare fund, and their employer will match that 2 percent. The other 2 percent goes to their retirement savings plan, and their employer will match 1 percent. In total, 7 percent of salary is contributed annually to the personal retirement savings component.
How Is the DB Portion of Michigan's Pension Plus Plans Calculated?
Pension wealth is derived from a formula. The figure below illustrates how a teacher pension is calculated in Michigan. It is important to note, however, that the state assesses an educator’s final salary based on their highest 60 consecutive months of salary. For example, a teacher who works for 25 years with a final average salary of $70,000 would be eligible for an annual pension benefit worth 37.5 percent of their final salary. But keep in mind the DB plan is only a portion of a teacher's retirement benefit under the hybrid plan.
Calculating DB Wealth in Michigan's Pension Plus Plans
|1.5% Multiplier||X||Avg. highest 60 consecutive months of salary||X||Years of service|
Who Qualifies for Benefits Under Michigan's Pension Plus Plans?
Like most states, teachers need to serve a number of years before qualifying for a retirement benefit. For teachers in the Pension Plus 2 plan, there is a 10 year vesting period for the DB component of the plan. While educators qualify for the pension portion after 10 years of service, the pension may not be worth all that much at that point, because educators can’t begin to collect their pension until they hit the state’s retirement age.
The state sets specific windows when teachers can retire with benefits based on age and years of experience. For teachers in either the Pension Plus or Pension Plus 2 plan, they can retire will full DB benefits at age 60 with at least 10 years of experience.
Teachers are automatically vested for their own contributions to the DC portion of the plan. After 2 years of service they are 50 percent vested for their employer contributions. After 3 years they are 75 percent vested. After 4 years they are fully vested.
How Does Michigan's DC Plan Work?
New and recently hired teachers are automatically enrolled in Michigan's DC retirement plan, which does not include a defined benefit component. Instead, this plan is a combination between a 457 retirement plan and a 401k plan. A teacher may contribute to the 457 portion of the plan as much as they would like up to federal IRS maximum contributions. In turn, their employer will contribute 50 percent of the teacher's contribution rate up to 6 percent to the 401k plan.
Teachers enrolled in this plan are immediately vested for their own contributions. They are 50 percent vested in their employers contributions after 2 years. After 3 years they are 75 percent vested, and fully vested after 4 years.
After vesting, the DC plan is fully portable. This means that workers who leave teaching or who leave Michigan to teach in another state can bring all their vested retirement funds with them. Teachers enrolled in a pension plan cannot do this, which likely results in much lower retirement earnings over their career if they change jobs or move across state lines.
Glossary of Financial Terms
Vesting period: The number of years a teacher must teach before becoming eligible to receive a pension. Although the length of vesting periods vary by state, 5 years is typical. In every state, a teacher who leaves prior to vesting is eligible to withdraw his or her own contributions, sometimes with interest, but few states allow those employees to collect any portion of the employer contributions made on their behalf.
Employee contribution: The percent of a teacher’s salary that he or she pays annually to the pension fund.
Employer contribution: The percent of a teacher’s salary that the state, school district, or a combination of the two pays annually to the pension fund.
Normal cost: The annual cost of retirement benefits as a percentage of teacher salary. This excludes any debt cost.
Amortization cost: The annual cost of a pension fund’s contribution toward any unfunded liabilities. This can also be thought of as the debt cost of the pension fund.