Michigan to enroll new teachers into 401(k) style retirement plan
In an effort to deal with the skyrocketing cost of teacher pensions, Gov. Dannel Malloy has proposed shifting one-third the cost of the pensions onto towns, a move that will likely drive up property taxes as municipalities scramble to come up with $408 million in 2018.
Michigan, on the other hand, has taken step in the opposite direction.
Gov. Rick Snyder is expected to sign into law major reforms to the state’s teacher pension plan – namely, shifting all new teachers into a 401(k) style defined-contribution plan.
The reforms come as Michigan’s teacher pension system faces a $29 billion shortfall. Payments toward the underfunded Michigan Teachers’ Retirement System account for 36 percent of school payrolls, up from 12 percent in 2002, according to the Michigan-based Mackinac Center for Public Policy.
Under the reforms, all new teachers will automatically enroll in a 401(k) style retirement plan unless they choose to opt into a smaller defined benefit/hybrid plan within 75 days. However, the hybrid system shuts down if funding ever falls below 85 percent.
The reforms did not change or cut the retirement benefits for current teachers or retirees, only for new teachers.
“This stops digging the hole deeper,” said John Mozena, spokesman for the Mackinac Center, which pushed for the change.
Connecticut faces similar issues with its teachers’ retirement system. Decades of underfunding and an ill-timed attempt to boost the pension fund with a $2 billion bond just before the 2008 market crash has left Connecticut’s teacher pension fund only 59 percent funded and facing a $10 billion shortfall.
The unfunded teacher pension liabilities for Michigan, whose population is nearly three times that of Connecticut, amounted to $2,929 per person.
The shortfall in the Connecticut teacher pension system amounts to $2,857 per person.
The state currently pays $1 billion per year into the pension fund but that figure is expected to grow to $1.3 billion by 2018 and to more than $6 billion by 2032, according to a study conducted by the Center for Retirement Research at Boston College.
The increased payments not only threaten Connecticut’s budget but also threaten education funding as more and more money is funneled into the pension system rather than into classrooms.
Unlike state employee pensions which are set through collective bargaining agreements, teacher pensions are set in state statute, meaning the legislature can make changes to the system by passing a law.
Thus far, lawmakers appear reluctant to push for any changes and the only attempt to bolster the pension fund was Gov. Dannel Malloy’s wildly unpopular idea of moving one-third of the pension costs onto municipalities, a plan that was rejected by the state appropriations committee.
However, Malloy’s proposal remains part of the ongoing budget negotiations and appears to have new life as lawmakers scramble for ways to close a $5.1 billion budget deficit.
Teachers currently contribute 6 percent of their salary toward their pension and the state contributes 24 percent. Connecticut teachers do not pay into and are not eligible for social security. This exemption leaves many Connecticut teachers without any retirement income from their teaching career.
The average teacher pension payment in Connecticut is one of the highest in the nation – $59,000 according to the state’s Office of Fiscal Analysis.
But the benefit of Connecticut’s pension system is not shared equally among teachers. Nearly half of all teachers leave the profession before they’ve reached the 10 year vestment period, meaning they won’t see a return on the money they’ve contributed nor will they receive social security credit for the time they’ve worked.
Only 39 percent of Connecticut teachers will actually reach the “break even” point of 25 years when they will finally see a return on the amount of money they’ve vested in the plan, according to separate studies from the Hoover Institution and EdChoice.
Other studies and organizations have criticized this disparity, arguing that teachers should have more portable retirement systems, enabling them to move to move their retirement plans to other school systems and other professions.
A 2017 study on whether or not the Connecticut teacher retirement system can be stabilized offered a number of potential reforms including moving new teachers to a defined contribution plan that would offer both portability and less risk for taxpayers and including them in social security.
Failure to take some kind of action may have consequences, according to study author, Eric Halpern. “Pension costs will crowd out other spending, or lead to tax increases. Notably, the financial drain created by the CTRS will reduce the available resources for meeting the educational needs of current students.”
Some Connecticut schools, notably in Bridgeport and Hartford, have been plagued with funding difficulties for years and Connecticut’s budget crisis could mean less state support in the future.
Michigan has taken the lead nationally in making reforms to the state pension system, moving their state employees to a defined contribution 401(k) style plan in 1996. Now new teachers will be enrolled in a similar retirement plan.
Joseph G. Lehman, president of the Mackinac Center, says the reforms will be beneficial to taxpayers and teachers, and prevent the crowding out of education funding due to mounting pension liabilities.
“For decades, elected officials around the United States failed to reform public pensions, hoping the ever-growing liabilities would be dealt with by someone else,” Lehman said. “It became increasingly obvious what was about to happen to our schools’ budgets.”
Advocates cautioned that it may take time for the savings to develop but that the reforms offered a long-term solution to a long-term problem.