Study finds forcing school employees into 401(k)-style retirement plans would cost taxpayers billions

A new independent study shows that switching all state and school employees to a 401(k)-style retirement plan would cost Michigan taxpayers a staggering $18.1 billion over the next 30 years.

As many private employers have transitioned into offering 401(k) retirement plans over providing traditional pensions to their employees, the theory behind the change has been that it saves employers money. However, the new study, conducted by the Segal Group for the state of Michigan, wholly debunks that myth.

Closing the defined benefit plan would cost taxpayers $4.5 billion over the next 10 years to make up for the drop-off in employee contributions to the Michigan Public School Employees Retirement System (MPSERS), according to the Segal Group’s study.

Meanwhile, moving completely to an unproven 401(k)-style retirement plan, where employees get 3 percent of their salary matched by the employer, would cost $13.6 billion over the next 30 years, according to the study.

The study comes as some Republican lawmakers have called for closing the pension system entirely.

“Their numbers make it even more expensive than we originally thought it was going to be," Sen. Roger Kahn, R-Saginaw, told the Detroit News. “You’ve got to be able to afford it, and we can’t afford a conversion to a defined contribution plan.”

“There doesn’t appear to be a strong recommendation or cost savings to move from the hybrid to a full (defined contribution) plan,” Lauren Leeds, spokeswoman for the Michigan Department of Technology, Management and Budget, told the News.

Reforming MPSERS has been a drawn-out debate in Lansing, which included the introduction of the hybrid retirement plan for new public school employees in 2010, and this year’s changes made by Public Act 300.

In 2011, the unfunded liability of the MPSERS was more than $45 billion. However, the new study found that MPSERS’ unfunded liability is not due to high benefit costs, as some erroneously argue, but rather because there are simply more retirees drawing benefits out than there are employees paying into the system, the Segal Group says.

Moreover, a push to privatize school support staff, and thus reduce the number of public school employees paying into MPSERS, has only increased the unfunded liability, according to the study.

The full study can be viewed here: http://www.michigan.gov/documents/orsschools/MI_403885_7.pdf