Michigan Legislature OKs steering new teachers into 401(k) plan
LANSING — More newly hired teachers and other school workers would be steered into a 401(k)-style retirement plan instead of one that includes a traditional pension under a contentious bill that passed a critical test in Michigan’s Republican-led Legislature on Thursday.
The Senate narrowly passed the legislation 21-17 and the House approved an identical measure 55-52, setting the stage for final voting next week.
New hires have qualified for both a pension benefit and a small 401(k)-type plan since 2010. Since 2012, they have been able to voluntarily choose a 401(k)-only account with a higher employer match.
The fast-tracked bill, which Gov. Rick Snyder plans to sign after a deal was reached days ago, would automatically enroll new employees hired on or after next Feb. 1 into a more generous 401(k)-only plan like what state workers receive — unless they opt out within 75 days and instead pay more of their salary toward a pension than current workers do. They would contribute 12.4 percent of their salary instead of 8 percent, according to the state budget office.
Republicans and conservative groups said the “landmark” legislation would keep in check unfunded liabilities in the Public School Employees Retirement System and give new hires a portable retirement account with no risk to future taxpayers. Democrats and teachers unions criticized the rushed passage of the bill, saying it would not reduce long-term debt in a legacy system that was closed seven years ago and would make it harder to recruit new teachers while exacerbating a shortage. They opposed provisions that would force those wanting a pension to assume more of the risk and eventually block them from any pension if a new system becomes underfunded.
“This is the final nail in the coffin,” said Sen. Coleman Young II, a Detroit Democrat, who called the bill “hideous” and said teachers deserve to retire with dignity. “What are we doing to this profession? … This is too important a profession to play politics with.”
But Rep. Tim Kelly, a Saginaw Township Republican, said public-sector pensions are a “vestige of a bygone era,” are no longer useful to attract good teachers and are consuming much more of school budgets.
“If we didn’t have these things, we’d be able to pay teachers better today, now,” he said. “We made these promises that we knew we were never going to keep. So finally we have to deal with this.”
It is unknown how many new hires would take the 401(k)-only plan. Currently, 20 percent voluntarily do. The Office of Retirement Services has estimated costs associated with the legislation by assuming 59 percent of new workers would go with the 401(k) — 95 percent of part-time employees and 5 percent of those working full-time.
A more conservative investment return assumption of 6 percent would be adopted, too, instead of the 7 or 8 percent in other pension systems. The retirement age to start receiving a pension — which is 60 for people hired since 2010 — could rise for new hires depending on a life expectancy study and whether unfunded liabilities occur.
The state’s overall unfunded pension liability totals $35.2 billion, including $29.1 billion for a system that covers employees of K-12 schools, libraries, community colleges and some universities.
This is the third overhaul of the teacher retirement system in seven years.
The Republican governor and GOP legislators in 2012 forced existing school workers to pay more toward retirement or receive a smaller pension — an automatic monthly payout that comes until death.
They also eliminated cost-of-living adjustments for new hires, and ended their retiree health insurance and replaced it with extra contributions to their 401(k) — which can be riskier for employees because they depend on investment returns.
“If this plan fails — and we are fearful it will down the line due to the lack of due diligence on this proposal — it will have huge costs for students, school employees and the state. Lawmakers who rammed this bill through today will need to answer for that decision,” said Steven Cook, president of the Michigan Education Association, the state’s largest teachers union.
Rep. Scott VanSingle, a Grant Republican, rejected allegations that the new pension plan is designed to fail.
“This plan should be a hundred percent funded and then some in the future,” he said. “Failure is not an option and most likely won’t happen.”