Michigan Pension Reform Saves $4 Billion

Before 1997, Michigan state employees (like those in Pennsylvania) solely received defined-benefit pensions in which employees are assured an annual retirement income. However in 1997, Michigan shifted public pensions from the defined-benefit program to defined-contribution retirement plan, like the 401(k) plans most companies in the private sector use.

Commonwealth Foundation Senior Fellow Rick Dreyfuss conducted a study for the Mackinac Center on the taxpayer savings from this shift. Dreyfuss discovered that Michigan saved more than $167 million in its annual funding of retirement benefits and more than $4 billion in unfunded liabilities.

Pension reform also shifted political incentives. In Pennsylvania and other states, legislators are able to increase benefits and postpone payments, driving up future liabilities.

Michigan’s reform does not allow for underfunding, as payments must be current into an employee’s retirement account, something Dreyfuss argues may be the greatest benefit of pension reform.