Wednesday, June 13, 2012

PART #2 .... Retirement Benefits for Michigan Teachers and the Financial Responsibilities of Taxpayers

There is currently a big debate going on in Michigan concerning public sector retirement benefits and how to pay for them.

Specifically, the discussion centers around whether the state will discontinue the pension plan for public school teachers and convert to a 401(k) plan instead. By doing so Michigan would be following the lead of many other states and eliminating an open ended funding guarantee currently assumed by state taxpayers.

Adopting a 401(k) plan would involve transferring the risk for underfunding retirement benefits from taxpayers to individual plan participants. That's been going on in the private sector for some time now.

Michigan's GOP Pension Scrap has the story:

"Anyone who thinks pension reform is a partisan issue should check in on Michigan. Republicans run the entire state government, but some of them are blinking like Democrats in Illinois.

Republicans in the state Senate recently committed the good deed of voting to close the public-school employee retirement program to newly hired teachers and move them into a 401(k)-style plan. This is the kind of reform that has long been occurring in the private economy and is crucial to getting pension costs under taxpayer control. The plan would also require that current workers contribute at least 5% of salary to their traditional pension.

Enter the Michigan House, also controlled by Republicans, which promptly dropped the Senate reform in favor of some useful patches that will reduce future liabilities and create an optional 401(k)-style plan. New teachers would be able to choose between a fixed pension and the 401(k)-type plan, which means keeping the gateway to the bankrupt pension system open.

Michigan needs reform, because the combined pension and health-care unfunded liabilities for its 450,000 education employees and retirees is close to $50 billion. Teachers can retire at age 55 (and in some cases earlier) with full benefits and take another job. The average retiree pays only 10% of health-care premiums, and teachers hired before 1990 contribute almost nothing to pensions.

The virtue of 401(k)-style plans, by contrast, is that they fix taxpayer costs, instantly reducing future liabilities that contributed to the bankruptcy of GM and are crushing California and Illinois.

Politicians can no longer raid pension funds to balance the budget in the short-term, and workers can't load up on overtime and sick leave in their final years to pad their lifetime pensions.

Part of the current debate concerns the transition costs of moving to the new system. Opponents claim that without new workers to pay for current retirees, short-term taxpayer costs can increase. . .

As it happens, Michigan has its own example of reform success. In 1996 John Engler became the first Governor to close a defined-benefit pension, and about 30,000 non-education state employees are now in 401(k)-like plans. . . .

Michigan shows that many politicians prefer short-term pension fixes, but the current defined-benefit system is unsustainable. Pension costs are already crowding out vital current services like schools, roads and police. If Michigan's House Republicans are too timid to adopt the Senate plan, the least they could do is amend theirs to increase the incentives to choose the 401(k)-style plan by requiring that employees contribute 15% or more of their salaries to the traditional pension."


GM's pensions were dramatically underfunded when it faced bankruptcy, so the federal government simply bailed out the company's unfunded pension liabilities by "loaning" GM enough money to buy annuities. By a stroke of the pen, the company's underfunded pension liability issue then disappeared for both GM and its employees and retirees.

So I ask, tongue firmly in cheek, why doesn't the federal government simply give Michigan another $50 billion to make its pension and health unfunded liabilities disappear as well? Or take it back from GM and give it to the Michigan public sector workers? Or ask Michigan taxpayers to vote for either (1) stay with GM annuities, (2) give it to public sector Michigan workers, (3) rebate $50 billion to Michigan taxpayers or (4) ask U.S. taxpayers in total if they'd prefer to pay back the Chinese the $50 billion and start all over again?  I vote for #4.

But then again, I don't live in Michigan nor do I work for GM. But if bailing out GM and Michigan retirees makes so much sense, how about other companies and states like Illinois, California and others with similar pension funding problems?

Or does the federal government have the resources to do so? And if it doesn't have the money, why did GM and the UAW get the help instead? Who decided, how did they decide and who really knew what they were doing at the time?  Not the taxpayers. That's for sure.

Here's the point. The U.S. had no business borrowing from the Chinese or even hitting up all taxpayers to fund GM's annuity purchases to satisfy its unfunded pension liabilities.

And for that reason, it certainly can't afford to add insult to injury by borrowing yet more money from the Chinese to do anything similar for the states of Michigan, Illinois and California, as examples.

Summing Up

The federal government has no place bailing private sector companies or their employees.

Neither do state government officials have a right to ask taxpayers to accept open ended and unfunded liabilities to pay the future promised retirement benefits for state workers.

If a state is going to continue to grant pensions (in lieu of 401(k) plan benefits) to its public sector employees, that state needs to make the case to taxpayers that their taxes will have to be increased to help satisfy those obligations.

And it also needs to make the case to public sector employees that employee contributions will have to make up the difference in the event that taxpayers are unwilling to pay the whole bill.

And it will also have to tell taxpayers why public sector employees will have guaranteed pensions while private sector workers won't have those guarantees.

The state of Michigan is strapped financially. That's in large part due to the fact that private sector companies like GM are now among the walking wounded, if not dead.

Once upon a time, when GM had 50% market share and was hugely profitable, all things were seemingly possible for both GM workers and Michigan state employees as well. As you know, a prosperous private sector can foot the bill for lots of public sector employees and services.

But those "good old days" in Michigan are long over. GM's state employment is way down, its market share is way down and its long term viability and staying power are by no means assured.

So where do Michigan legislators, and the federal government's politicians as well, come off acting as if nothing has changed financially?

For those of us not "afraid to see what we can see" with respect to reality, we know that things must change and they must change now.

Somebody needs to awaken the government, including Michigan Republicans, and tell them the simple facts of life.

There's no money left in GM's coffers. There's no money left in Michigan's coffers. There's no money left in the city of Detroit's coffers. There's no money left in the federal government's coffers.

Being in debt up to our eyeballs is bad enough. Not being willing to "see" that reality is even worse.

With respect to new American government debt, including that of the states, to "follow the money"  requires that we head straight to China. And that's not where we want to go.

Stay tuned for Part #3.

Thanks. Bob.

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