The state should ensure that pension systems are neutral, uniformly increasing pension wealth with each additional year of work.
The defined benefit component of Michigan's pension system is based on a benefit formula that is not fully neutral, meaning that each year of work does not accrue pension wealth in a uniform way until teachers reach normal retirement age, such as that associated with Social Security. The defined contribution component is neutral because there is no formula to calculate benefits. Teachers are entitled to their account balance which accrues fairly for each year of work.
Teachers' retirement wealth is determined by their monthly payments and the length of time they expect to receive those payments. Monthly payments are usually calculated as final average salary multiplied by years of service multiplied by a set multiplier (such as 1.5 percent). Higher salary, more years of service or a greater multiplier increases monthly payments and results in greater pension wealth. Earlier retirement eligibility with unreduced benefits also increases pension wealth, because more payments will be received.
To qualify as neutral, a pension formula must utilize a constant benefit multiplier and an eligibility timetable based solely on age, rather than years of service. Basing eligibility for retirement on years of service creates unnecessary and often unfair peaks in pension wealth, while allowing unreduced retirement at a young age creates incentives to retire early. Plans that change their multipliers for various years of service do not value each year of teaching equally. Therefore, plans with a constant multiplier and that base retirement on an age in line with Social Security are likely to create the most uniform accrual of wealth.
Michigan's pension plan is commended for utilizing a constant benefit multiplier of 1.5 percent and for basing retirement on age rather than years of service; however, teachers may retire with unreduced benefits at age 60 with 10 years of service, which is well before Social Security's retirement age. This provision may encourage effective teachers to retire early and fails to treat equally those teachers who enter the system at a later age and give the same amount of service.
Michigan Public School Employees’ Retirement System, Comprehensive Annual Financial Report for fiscal year ended September 30, 2015.
Align eligibility for retirement with unreduced benefits with Social Security retirement age.
Michigan allows teachers to retire before conventional retirement age. As life expectancies continue to increase, teachers may draw out of the system for many more years than they contributed. This is not compatible with a financially sustainable system (see pension sustainability goal). If retirement at an earlier age is offered to some teachers, benefits should be reduced accordingly to compensate for the longer duration they will be awarded.
Michigan acknowledged the factual accuracy of this analysis.