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. (2017). Pension Sustainability: Michigan results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/MI-Pension-Sustainability-80

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.

Updated: December 2017

Pension Neutrality

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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. Pensions, upon vesting, provide compensation for teachers the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, many teachers' generous pensions remain fixed. In fact, nearly all states continue to provide teachers with a defined-benefit pension system,^{^[1]} an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers.^{^[2]}

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.^{^[3]} Without reform, funding is unlikely to keep up with promised benefits and these systems will become increasingly vulnerable to collapse.

Pension plans disadvantage teachers early in their careers. By overcommitting employer resources to retirement benefits, these plans often require districts to depress salaries and restrict incentives. 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.^{^[4]} Lower mandatory employer contribution rates (in states where they are too high; in some states they are shamefully low) would free up valuable compensation resources to ensure pension systems are more sustainable and equitable for all teachers. In addition, some states require high employee contributions; the impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.^{^[5]}

The burden placed on districts to fund unsustainable pension systems is further exacerbated for those in states where 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.^{^[6]}

^{^[1]} Doherty, K. M., Jacobs, S., & Lueken, M. F. (2017, February). Lifting the pension fog: What teachers and taxpayers need to know about the teacher pension crisis. Retrieved from National Council on Teacher Quality website: https://www.nctq.org/dmsView/Lifting_the_Pension_Fog
^{^[2]}For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Costrell, R. M., & Podgursky, M. (2011, February). Reforming k-12 educator pensions: A labor market perspective. New York, NY: TIAA-CREF Institute. Retrieved from https://www.tiaainstitute.org/public/institute/research/briefs/institute_pb_reforming_K-12_educator_pensions.html
^{^[3]}NCTQ's analysis of the financial sustainability of state pension systems is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office. (2007). Government Accounting Standards Board statement No. 25. Retrieved from http://www.gasb.org/st/summary/gstsm25.html
^{^[4]}Costrell, R. M., & Podgursky, M. (2011, February). Reforming k-12 educator pensions: A labor market perspective. New York, NY: TIAA-CREF Institute. Retrieved from https://www.tiaainstitute.org/public/institute/research/briefs/institute_pb_reforming_K-12_educator_pensions.html
^{^[5]}For further evidence supporting NCTQ teacher pension standards, see The Segal Group, Inc. (2010). Public employees' retirement system of the state of Nevada: Analysis and comparison of defined benefit and defined contribution retirement plans. Retrieved from https://www.nvpers.org/public/executiveOfficer/2010-DB-DC%20Study%20By%20Segal.pdf
^{^[6]}For additional information on state pension systems, see Loeb, S. & Miller, L. (2006). 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. Retrieved from http://web.stanford.edu/~sloeb/papers/Loeb_Miller.pdf; and Hansen, J. (2008, May). Teacher pensions: A background paper. Committee for Economic Development. Retrieved from http://eric.ed.gov/?id=ED502293

State Teacher Policy