Saturday, July 15, 2017

Michigan is becoming a leader in pension reforms

The Heritage Insider

Michigan is becoming a leader in pension reforms. Anthony Randazzo explains:
“Michigan’s Gov. Snyder has signed into law a first-of-its-kind, innovative pension reform bill that will provide a new set of retirement choices for state teachers and cap the growth of liabilities in the state’s current, structurally flawed retirement plan. The Michigan Public School Employee System (MPSERS)—currently only 60% funded with $29 billion in unfunded pension liabilities—now has its most realistic path to solvency in the past two decades.” 
Randazzo writes that the new plan includes better actuarial assumptions as well as the following elements:
· New hires will be auto-enrolled in a defined contribution retirement plan (DC Plan) that has a default 10% total contribution rate. DC Plans inherently have no risk of unfunded liabilities, and the maximum employer share for the plan (7%) is less than what employers should be paying for the current plan.
· However, if new teachers would prefer a defined benefit pension plan (DB Plan), they will have the choice to voluntarily switch to a new ‘hybrid’ plan that, unlike the current ‘hybrid’ plan offered to teachers, uses very conservative assumptions and short amortization schedules and splits all costs 50-50 between the employee and employer.
· Uniquely, the hybrid plan will have a safeguard mechanism that would trigger closure if the funded ratio falls below 85% for two consecutive years.” [Reason Foundation]
And James Hohman writes:
“Michigan’s situation is not unique, but the legislation signed by Gov. Snyder today goes farther than any other reforms to limit the ability to promise benefits now and push the costs onto future taxpayers. Some states have passed legislation that offers new employees a less generous retirement package, but this does little to stop generating new debt. Michigan’s move restrains the problem from getting worse, provides even more generous benefits to future hires and leaves the pensions of current teachers and retirees untouched.” [Mackinac Center]