Teacher pension fight pits portability vs. risk
Correction: This story has been updated to correct yearly pension benefit amounts for Michigan teachers.
Lansing — Republicans pushing for teacher pension reform argue 401(k)-style retirement saving plans are a better deal for young educators, who are now at risk of losing some guaranteed retirement benefits if they leave public education.
State records show that nearly half of all teachers and staff paying into the system today are not yet “vested,” meaning more than 100,000 members have not yet worked the 10 years required to guarantee pension benefits.
If they left public school employment today, they would qualify for a refund of their own contributions, plus interest, but forfeit all service credit they had earned toward a pension. They don’t lose any money in a retirement savings plan, say GOP legislators, who want to close Michigan’s teacher pension to new hires.
But the “hybrid” state pension plan provided since 2010 allows educators to vest at least a portion of their retirement benefits within two years. Supporters say the promise of a long-term pension payout remains a big draw for prospective job seekers and a significant reward for dedicated professionals.
The debate over pension reform has derailed budget talks. Republican legislative leaders keep pushing the issue — setting aside $475 million in next year’s budget plan — despite GOP Gov. Rick Snyder’s resistance to potential transition costs.
The appeal to younger professionals is a central argument for reform proponents seeking to address $29.1 billion in accrued unfunded liabilities in the teacher pension system. They contend that proposed 401(k)-style retirement plans – while less lucrative – would be more portable, flexible and responsive to the needs of a mobile generation.
“I think if you were to poll folks that are in the (pension system) at this point that have less than five or six years in there, they would want something like this,” said Senate Majority Leader Arlan Meekhof, R-West Olive. “It’s similar, if not exactly the same as what legislative folks have, and I think that’s fair.”
The retirement plan proposed by Republicans includes an employer contribution match of up 7 percent of their salary that educators could keep a portion of after two years and all of after four years. Teachers also could keep any gains made through investments.
“It’s much better if you’re not going to be there to vest — that’s clear,” said sponsoring Rep. Thomas Albert, R-Lowell.
Democrats and teachers unions say the state’s hybrid pension plan already offers some flexibility and encourages longevity in a field struggling with high turnover rates and subject-specific shortages.
“You don’t go into teaching because you’re going to get rich, and certainly the pay rates aren’t very good starting out, but the idea that you have some potential security on the back end I think is incredibly important to people,” said state Sen. Curtis Hertel Jr., D-Meridian Township.
One in 10 Michigan teachers leaves the profession each year, according to a 2016 report from the Learning Policy Institute. That’s higher than the national attrition rate of around 8 percent and more than double the rate across the border in Ontario, Canada.
Michigan enacted a new law in 2015 allowing retired teachers to rejoin the workforce without affecting benefits to fill “critical shortage” positions, which this year includes math, special education and health instructors.
“Continuing to attack the livelihood and retirement security of school employees will only make that problem worse,” Michigan Education Association President Steven Cook said upon introduction of the pension reform legislation.
The MEA and other union groups plan to fight the teacher pension reform plan.
Most other states offer teacher pensions, including West Virginia, which closed its system in 1991 but reopened it 15 years later. Few Michigan charter schools are part of the state pension system, however, and Hertel questioned whether the reform effort is a veiled attempt to make them more competitive.
A vested interest
As of September, 103,486 of the 207,645 active members in Michigan’s teacher pension system had not met the 10-year vesting mark to guarantee their financial benefit is there when they turn 60, according to an annual state report.
But most educators hired since July 2010 are part of a hybrid plan that includes a defined contribution component allowing them to vest a portion of their retirement plan at a faster rate.
Hybrid plan members must work for a Michigan public school for at least 10 years to qualify for pension benefits, but they can also contribute a portion of their salary to a “tier II” account and qualify for an employer match.
Their own tier II contributions vest immediately, while employer matches vest at 25 percent after two years on the job, 75 percent after three years and 100 percent after four years of service — just like 401(k)-style plans for state employees and the proposed plan for educators.
“If teachers are looking for flexibility, we’ve already made that change here in Michigan,” said Sen. David Knezek, D-Dearborn Heights.
Still, it would take a teacher in the hybrid system more than two decades to break even on their pension contributions and financially benefit if they retired, said James Hohman of the Mackinac Center for Public Policy, a free-market think tank that supports pension reform.
“A pension system can be as generous or stingy as you want it to be; it’s a matter of design,” Hohman said. “What they’ve done with the hybrid plan is create a system that only pays off for people who work a full career in any public school district in the state of Michigan at the expense of all other teachers in that system who won’t do that.”
Michigan already offers teachers a 401(k)-style retirement option. But with maximum employer contributions of 3 percent of salary, it is less generous than the version offered to state employees. Few teachers now enroll.
Republican legislation that would mandate the move to 401(k)-style plans would allow teachers to qualify for employer contributions of up to 7 percent, matching the state employee plan.
Pension reform supporters say moving all new hires to 401(k)-style plans would benefit young teachers, including millennials who are increasingly changing careers at faster rates.
Forty percent of Michigan teachers end up leaving the job within five years, said Anthony Randazzo of the Reason Foundation, a libertarian think talk working with Michigan GOP legislators. Only 20 percent of teachers work the 30 years necessary to maximize full retirement benefits, he said.
“From our perspective, when we look at a system like MPSERS, we see $29 billion in debt that has accumulated over the last 20 years along with a benefit itself that is not working for all teachers,” Randazzo said.
401(k) plans less generous
Michigan moved all new state employees, including legislators, into 401(k)-style plans in 1997. Under those plans, all employee contributions immediately vest, while state contributions of up to 7 percent fully vest after four years.
But those 401(k)-style plans are “very inadequate” for many retirees, “and state employees are starting to discover that now,” said Todd Tennis of the Coalition for a Safe and Secure Retirement.
While the tax-deferred plans allow state employees to contribute larger portions of their income, most cannot afford to put “5 or 10 percent of their income into a retirement plan” when they’re trying to make car and mortgage payments, Tennis said.
He estimates a state worker who got a 401(k) and is now approaching retirement age has probably saved around $125,000 for retirement.
“That sounds great, until you realize you have to live off that for 10 to 20 years,” Tennis said. “What happens if you use it up? Then you’re out of luck. That’s one of the great hazards of a 401(k) is the likelihood that you outlive your retirement benefit. That doesn’t happen with a traditional pension that’s guaranteed for life.”
Michigan teacher pension benefits are based on how much a teacher earned over the final three or five years of their career, depending on their date of hire. A teacher who worked three decades and earned a final average salary of $60,759 could get a monthly benefit of $2,891, according to the Office of Retirement Services. A retired pension member with 20 years of credited service who earned $38,452 could get $1,162 a month.
The system rewards longevity and 401(k) plans could reduce that incentive, Hertel said, arguing Republican policies have already “de-professionalized teaching and made it much less attractive” to job seekers.
“Why would we want to encourage teachers to leave the profession?” he said. “I find it ironic the same people who are creating those problems are now coming back and saying we should change the system on behalf of teachers.”