Pension Sustainability: Michigan

Pensions Policy

Look at National Findings

Goal

The state should ensure that excessive resources are not committed to funding teachers' pension systems.

Meets goal in part

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

Analysis of Michigan's policies

As of September 30, 2015, the most recent date for which an actuarial valuation is available, Michigan's defined benefit pension system for teachers is 62.9 percent funded, an increase of 1.6 percentage points since NCTQ's last report. Its current pension debt exceeds $16,100 per pupil throughout the state. It also has a 21-year amortization period. This means that if the plan earns its assumed rate of return or 7 percent and makes its full actuarially determined contribution payments, it would take the state 21 years to pay off its unfunded liabilities. While its amortization period meets regulatory benchmarks, Michigan's funding level is below recommended levels. The state's system is short of being financially sustainable according to actuarial benchmarks.

Michigan commits excessive resources toward its teachers' defined benefit retirement system. The employer contribution rate to the defined benefit plan of 25.78 percent is too high, in light of the fact that local districts must also contribute 6.2 percent to Social Security. Participating employers are required to contribute at an actuarially determined rate. While this rate allows the state to pay off liabilities within 21 years, it does so at a high cost, precluding Michigan from spending those funds on other, more immediate means to retain talented teachers. The mandatory employee contribution rate to the defined benefit plan of 3 percent on income up to $5,000, 3.6 percent on the next $10,000 of income, and 6.4 percent on all compensation above $15,000 is reasonable. Employees are automatically enrolled to contribute 2 percent of salary to the DC component and may elect to increase or decrease this amount. Employers contribute a 50 percent match up to a total of 1 percent.

Recommendations for Michigan

State response to our analysis

Michigan acknowledged the factual accuracy of this analysis.

Pension Neutrality

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Pensions

Research rationale

Many states' pension systems are based on promises they cannot afford to keep.

Teacher salaries are just one part of the compensation package that teachers receive. Virtually all teachers are also entitled to a pension, which, upon vesting, provides compensation for the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, teachers' generous pensions remain fixed. In fact, 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.

Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices. Without reform, these systems are a house of cards, vulnerable to collapse as funding cannot keep up with promised benefits. And it is taxpayers who will have to pay if it all tumbles down.

Pension plans disadvantage teachers early in their careers by overcommitting employer resources to retirement benefits.

The contribution of employers to their workers' retirement benefits is a valuable benefit, important to ensuring that individuals have sufficient retirement savings. Compensation resources, however, are not unlimited, and they must fund both current salaries and future retirement benefits. Mandated employer contributions to many states' teacher pension systems are extremely high, leaving districts with little flexibility to be more innovative with their compensation strategies. This is further exacerbated for states in which teachers also participate in Social Security, requiring the district to pay even more toward teacher retirement. While retirement savings in addition to Social Security are necessary, states are mandating contributions to two inflexible plans rather than permitting options for teachers or their employing districts.

This approach to compensation disadvantages teachers early in their careers, as the commitment of resources to retirement benefits almost certainly depresses salaries and prevents incentives. Lower mandatory employer contribution rates (in states where they are too high; in some states they are shamefully low) would free up compensation resources to implement the kinds of strategies suggested elsewhere in the Yearbook. In addition, some states require high employee contributions; the impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.

Pension Sustainability: 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).

State Teacher Policy