|MEA-Retired Officers and Board MembersChuck Agerstrand, Retirement Consultant
March 16, 2011
Pension Contribution rates will see an increase. Odds are good that public schools will face a dramatic increase in the amount they must pay toward the MPSERS Retirement System in 2011-12, though it’ll be several weeks before the actual contribution rate is announced.
Rumors of a projected 5 percent increase in the retirement contribution rate - (currently 20.66 percent for pre July 1 school employees and 19.41 percent for post July 1 new employees) -may prove fairly accurate.
On a positive note, retiree health costs and the health contribution rate is stable and will not add any significant increase to the contribution rate for 2011-12. MPSERS will likely release the official rate data for next year within the next several weeks. MEA staff continues to monitor developments and will provide timely updates as additional information is available
Public pension plans are not in crisis although politicians will have you believe otherwise. Most state and local government employee retirement systems have substantial assets to weather the current economic crisis; those that are underfunded are taking steps to strengthen funding. It is important to understand that pensions are funded and paid out over decades. There are currently adequate funds already set aside in the Michigan School Employees Retirement System to fund for pensions of current (as of September 2010 there were 166,749 retirees) and future retirees. Further, school retirees do not draw down their pensions all at once. Employees must reach certain age and/or years of service before they are eligible for a pension; once retired, they must receive their pension in installments over their retirement years (as an annuity).
State and local governments are already taking steps to secure their pensions for the long-term. More state and local governments enacted significant modifications to improve the long-term sustainability of their retirement plans in 2010 than in any other year in recent history. In the past few years, nearly two-thirds of states have made changes to benefit levels, contribution rate structures, or both; many local governments have made similar fixes to their plans. Here in Michigan we witnessed changes in the defined benefit pension plan and now we have a “hybrid” pension plan that is a defined contribution plan combined with a defined benefit plan for employees hired after July 1, 2010. These changes while we did not support will help to stabilize future employer contributions. As of September 2010 the MPSERS actuarial value as contrasted with September of 2009 indicate that the assets and actuarial accrued liability were $44.7 billion and $56.7billion, respectively, resulting in a funded ration of 78.9 percent. The funded ration for post employment benefits (health insurance) was approximately 2.5%.
Public school employees share in the financing of their pension. The vast majority of public employees are required to contribute a portion of their wages toward their pension and while the rates have increased thanks largely to a 3 percent tax against salary that is slated to fund future retiree health care benefits, it remains uncertain how the courts will rule on the 3 percent charge. Public Act 75 of 2010 requires each actively employed member of MPSERS after June 30, 2010 to contribute 3 percent of their compensation to offset employer contributions for health care benefits of current retirees. In 2010 the combined expense for health, dental and vision insurance totaled $705,161,012 which is a decrease from 2009 when the total cost was $794,850,203.
Pension dollars help the economy of every jurisdiction. Public employees live in every city and county in the nation; more than 90 percent retire in the same jurisdiction where they worked. Here in Michigan approximately 85 percent of retirees maintain their residence in the area where they worked. The over $175 billion in annual benefit distributions from pension trusts are a critical source of economic stimulus to communities throughout the nation, and act as an economic stabilizer in difficult financial times. Recent studies have documented public retirement system pension distributions annually generate over $29 billion in federal tax revenue, more than $21 billion in annual state and local government tax revenue, and a total economic impact of more than $358 billion.
Pension plans under attack. There exists an unprecedented push by state governors and legislators in approximately 24 states to change or modify employee pension plans and as such this could significantly remake many of the pensions for public employees. Everything from increasing employee pension contributions; to taxing pension income; reduce and/or freeze COLA’s; eliminating COLA’s; rolling back pension formula’s; moving from DB plans to DC plans; requiring employee contributions or increasing same; change pension eligibility requirements. The key difference this year is that these changes are also aimed at existing pensioners and not just new employees. Certainly these changes will have far reaching implications for affected employees. If retirees are to protect themselves against these initiatives it will requires a level of political activism unlike anything we have generated thus far.
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