Republican lawmakers and Michigan Gov. Rick Snyder are close to a deal that would change the state’s retirement system for new teachers.
The aim is to automatically enroll new teachers in a fully portable 401(k)-type plan. Although the details are still being worked out, the Associated Press reports that the new plan could potentially include a 4 percent or 7 percent employer contribution. To get the higher employer contribution, teachers would have to chip in a portion of their pay, with the state matching the first 3 percent.
New teachers can still opt for a hybrid plan, a mix of pension and 401(k)-type options that Michigan has offered since 2010, but the new hybrid plan will be structured in such a way that it requires teachers to foot a higher share of the contribution than they currently do. This new hybrid system would replace the one created in 2010, and could be closed it if is underfunded, according to the Associated Press.
Under hybrid plans, teachers must vest into the pension portion, which in Michigan takes 10 years. Teachers are eligible to receive the full employer contribution to the 401(k) part of the plan after four years, but they are always eligible to get their own contributions, along with any interest earnings, should they move to another state or leave the profession altogether.
“We have a tentative framework,” Snyder told reporters after meeting with Republican lawmakers on Thursday. “We still need to continue to work out some of the things that provide, I think, better retirement for school employees.” Snyder, a CPA, had previously opposed any changes to the teacher retirement system, which since 2010 has offered new teachers a hybrid retirement plan, arguing that a switch to a full-fledged 401(k)-type plan would be too costly. In fact, as Emmanuel Felton reports in this Teacher Beat blog post, researchers estimated the move would cost the state an additional $4.5 billion over ten years.
Sen. Curtis Hertel Jr., a Democrat, has argued that changes to the retirement system will make fixing the state’s teacher shortage that much more difficult. “When you’re actually trying to recruit the best and brightest into our state, the best way to do that is actually to keep the same benefits that are standard [in] other places,” he told the Associated Press. “Teachers don’t work for large salary increases. The one promise you have is you have a future pension.”
Yet lawmakers pushing for 401(k)-style retirement plans say young teachers entering the profession today are more mobile and therefore value portability of benefits. To make the plan even more attractive, lawmakers may reduce the number of years to fully vest in the plan. Currently, Michigan teachers must put in 10 years to fully vest in the hybrid plan.
The overarching goal, of course, is to save the state money in the long run. Republican lawmakers say a move to a 401(k)-style retirement plan is necessary to slash the more than $29.1 billion in unfunded liabilities facing the Michigan Public School Employee Retirement System.
The Debate Over 401(k)-Type Plans
Similar battles over replacing pensions with 401(k)-style plans have been playing out in places like Pennsylvania, Georgia, and in cities like Chicago. While the motivation, as in Michigan, is to cut unfunded liabilities to the pension system, lawmakers are also arguing that the move benefits new teachers.
Pension critics, for example, argue that few teachers, just 1 in 5, remain in the profession long enough to reap the benefits of a defined-benefit teacher pension plan. That’s because the majority of wealth doesn’t begin to amass until close to retirement. So teachers who quit or move to another state before that lose out on significant earnings. Teachers who leave before they vest in a pension can take the money they put in, usually with interest, but must forfeit employer contributions. A teacher who puts in 30 years altogether, but divided that time evenly between two different states, loses out compared to one who stays in the same place, because pension benefits are typically not portable across state lines. That teacher ends up with two mediocre pensions.
Still, teachers’ unions argue that portable 401(k)-type plans contribute to turnover, since teachers are eligible to take their contributions, plus interest earnings, with them whenever they leave the profession. The deferred benefit of the traditional pension plan, they say, entices teachers to remain in the profession longer.
In a recent blog post on teacherpensions.org, Chad Aldeman of the Washington consulting firm Bellwether Education Partners argues that a close look at states’ pension plans shows that teachers don’t change their behavior in order to qualify for a pension. Teachers close to retirement may make the choice to remain on the job in order to collect pension benefits, he acknowledges—but adds that most teachers have left the profession before this so-called “pull” effect occurs.
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A version of this news article first appeared in the Teacher Beat blog.