Michigan Pensions Protest

Attention Michigan: Closing a Pension System is Never a Good Idea

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Is anyone else experiencing some serious deja vu?

Michigan Senate Majority Leader Arlan Meekhof has been tossing around the idea of closing the Michigan Public School Employees Retirement System (MPSERS) pension plan and moving new hires to a defined contribution 401(k). If this sounds familiar, it’s because Republican legislators attempted this a mere 5 months ago during a lame-duck session. That attempt was soundly defeated following a vigorous backlash from both working people and the Governor’s administration.

Despite their recent failure, these anti-pension lawmakers are at it again with a renewed attempt to weaken the retirement security of Michigan’s public school employees (you know, the people who oversee the education of our children for an average of salary of $61,875 per year).

We’ve said it before and we’ll say it again: closing a pension system is never a good idea. One need look no further than the states and cities that have closed their pension systems to learn of the costly ramifications that follow. What’s most baffling, perhaps, is that Michigan is one of those states.

In 1997, the Michigan State Employees’ Retirement System (MSERS) pension plan was closed and new hires were placed in a 401(k)-style plan. At the time of the plan’s closure, the funded status was 109%. With no new employees paying into the pension fund and an aging demographic, plan costs soared and the funding level dropped; by 2012, the plan was severely underfunded at 60.3%. After 20 years under the 401(k) plan, the state’s Office of Retirement Services found that the median balance in these accounts is just $37,260.

While Michigan continues to suffer the consequences of the MSERS closure, other states and municipalities have realized the error of their ways and taken steps to reinstate closed plans.

In 2005, West Virginia reopened its pension system for teachers after closing the plan in an attempt to improve funding levels in the early nineties. In less than a decade after the plan’s reopening, funding levels more than doubled and teachers now enjoy access to a secure, dignified retirement.

After the Great Recession decimated 401(k) accounts across the country, state employees in Connecticut banded together and campaigned for the right to join the closed state pension system. They were successful, and in 2012, transfers out of the faltering 401(k) plan and into the pension began. Estimates place the total cost savings for the State of Connecticut as a result of these transfers at $10 million per year.

State employees weren’t the only ones in Connecticut to recognize the value of a pension: firefighters in the city of New London moved back to a pension in 2014 after the previous defined contribution plan failed to provide adequate financial security for retirees.

Aside from providing employees with the most secure retirement, pensions also serve as a valuable tool to recruit and retain talented workers. In 2012, the city of Palm Beach, Florida moved from a traditional pension to a hybrid defined benefit-defined contribution plan. The city lost 24 public safety officers to neighboring jurisdictions and another 28 left the following year. Without competitive retirement benefits to offer, Palm Beach’s police and fire departments were inexperienced and understaffed. In 2016, the city council voted to return to a traditional defined benefit pension.

Those who do not learn history are doomed to repeat it – and Michigan legislators clearly haven’t learned from their own recent history. Closing a pension plan is a surefire way to cause funding levels to plummet while plan costs soar. Not to mention the increased cost of offering a defined contribution plan; according to the National Institute on Retirement Security: “For a given level of retirement income, a typical 401(k) plan costs 91% more than a typical pension plan.”

It’s time for Michigan legislators to retire the idea of closing MPSERS once and for all. As long as they continue to push this failed policy, they’ll have to answer to hundreds of thousands of Michiganders whose retirement security is on the line.