Pension Flexibility: Michigan

2015 Pensions Policy

Goal

The state should ensure that pension systems are portable, flexible and fair to all teachers.

Meets in part
Suggested Citation:
National Council on Teacher Quality. (2015). Pension Flexibility: Michigan results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/MI-Pension-Flexibility-74

Analysis of Michigan's policies

Michigan offers teachers who become a member on or after September 4, 2012 a choice between a type of hybrid pension plan, known as Pension Plus, and the Defined Contribution (DC) plan, an employee 401(k) retirement account. A hybrid plan has elements of both defined benefit and defined contribution plans. Even though Michigan's plan is a hybrid, it is not fully portable, does not fully vest until year 10, and only provides minimal employer contribution for teachers who withdraw their accounts. It also limits flexibility by restricting the ability to purchase years of service. The DC plan is fully portable, and teachers can vest in the full amount of employer contributions after 4 years.

Under the hybrid plan, teachers and employers contribute to both a defined benefit component and a defined contribution component. Contributions to the defined benefit component are mandatory, while contributions to the defined contribution component are optional. Teachers automatically contribute 2 percent of their salary to the defined contribution component with employers contributing a 50 percent match up to 1 percent of salary. Teachers may choose to increase or decrease their contribution levels. Although the hybrid plan is not fully portable, the state is commended for offering a DC plan as an option for Michigan teachers, which allows full portability of teachers' retirement accounts. Given that teachers in Michigan also participate in Social Security, concurrently providing a DC plan as an option for teachers affords more flexibility for retirement as Social Security provides a lifetime of payments while the DC plan offers more control and direction over retirement savings.

In 2012, Michigan passed Public Act 300 which offers all active members who first became a member before July 1, 2010 to make a voluntary election regarding their contributions and benefits. Any changes are applied as of the first day of one's pay period after February 1, 2013. Members could elect to increase their contributions in exchange for keeping the 1.5 percent multiplier, keep contributions the same in exchange for a reduced 1.25 percent multiplier, or discontinue contributions to the pension fund in exchange for switching to the DC plan.

Vesting in the DC plan and DC component of the hybrid plan entitles teachers to permanent rights to their own contributions and any available employer contributions. Michigan teachers vest immediately in their own contributions to the defined contribution plan and all employer contributions after four years of service.

Vesting in the defined benefit component of the hybrid plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Non-vested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Michigan's vesting at 10 years of service is very late and limits the options of teachers who leave the system prior to this point, though teachers who leave early at least have an option to join a fully portable plan instead. Many teachers in Michigan will leave the system before they reach 10 years of service. According to a recent report, about 43 percent of employees in Michigan's teacher-covered pension plan vest, meaning that 57 percent do not become eligible for a pension and, therefore, can only collect their refundable contributions. Teachers in the hybrid plan who choose to withdraw their contributions upon leaving only receive their own contributions and accrued interest from the defined benefit part. Further, teachers who remain in the field of education but enter another pension plan (such as in another state) may find it difficult to purchase the time equivalent to their prior employment in the new system because they are not entitled to any employer contribution from the defined contribution component.

Michigan does not allow teachers to purchase years of service, either for previous teaching or for leaves of absence, for use in the Pension Plus (hybrid) plan. The ability to purchase time is important because defined benefit plans' retirement eligibility and benefit payments are often tied to the number of years a teacher has worked. Michigan's plan does not allow teachers to purchase time for previous teaching experience or for time while on approved leaves of absence. This provision is a disadvantage to teachers who move to Michigan with teaching experience and those teachers who need to take more than one year of leave, such as for maternity or paternity leave.

Citation

Recommendations for Michigan

Increase the portability of its defined benefit plan.
If Michigan maintains its defined benefit plan with a hybrid component, it should allow teachers that leave the system to withdraw employer contributions from the defined benefit component. The state should also allow teachers to purchase their full amount of previous teaching experience upon the first day of employment, allow for the purchase of at least one year for each approved personal leave and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.

State response to our analysis

Michigan acknowledged the factual accuracy of this analysis.

How we graded

Research rationale

Anachronistic features of teacher pension plans disadvantage teachers early in their careers.

Nearly all states continue to provide teachers with a defined benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers. To achieve the maximum benefits from such a plan, a teacher must begin and end his or her career in the same pension system. Teachers who leave before vesting—which is as much as 10 years in some states—are generally entitled to nothing more than their own contributions plus some interest. This approach may well serve as a retention strategy for some, but on a larger scale it fails to reflect the realities of the current workforce. At present, the United States is experiencing an explosion in school-age populations in some states, while other states are experiencing a decline. The nation's workforce needs to be able to respond to these changes. The current workforce is increasingly mobile, with most entering the workforce expecting to change jobs many times. All workers, including teachers, may move to jobs in other states with no intention of changing careers. To younger teachers in particular, a defined benefit plan may seem like a meaningless part of the compensation package and thus fail to attract young talent to the profession. A pension plan that cannot move across state lines and that requires a long-term commitment may not seem like much of a benefit at all.

There are alternatives. Defined contribution plans are fair to all teachers at all points in their careers. These plans are more equitable because each teacher's benefits are funded by his or her own contributions plus contributions from the employer specifically on the individual employee's behalf. This is fundamentally more equitable than defined benefit plans, which are generally structured to require new teachers to fund the benefits of retirees. Moreover, defined contribution plans are inherently portable and give employees flexibility and control over their retirement savings. It must also be noted that defined benefit plans can be portable and fair, if structured as cash balance plans or plans that permit the withdrawal of employer contributions.

Pension Flexibility: Supporting Research
NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010). Can be accessed at: http://docplayer.net/16288272-Public-employees-retirement-system-of-the-state-of-nevada-analysis-and-comparison-of-defined-benefit-and-defined-contribution-retirement-plans.html