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Def⁠i⁠ned Benef⁠i⁠⁠t⁠s R.I.P.

By: The James Madison Institute / August 3, 2011

The James Madison Institute

Blog

August 3, 2011

By Thomas Perrin, JMI Public Affairs Director
In 1997, Michigan was the first state in the country to end defined-benefit plans in their Michigan State Employee Retirement System (MSERS). Now, a new study has been conducted by the Mackinac Center for Public Policy that analyzes the results of that act. The study reveals that since 1997, “[The legislation] is estimated to have saved state taxpayers $167 million in pension normal costs, $2.3 billion to $4.3 billion in lower unfunded liabilities, and important but unquantifiable sums by improving the political incentives of pension funding.”The study also further debunks the myth that switching to defined-contribution plans is initially costly. The report explains: “Some argue that any savings from switching new employees from a defined-benefit to a defined-contribution plan is mitigated by the fact that closing the defined-benefit plan requires future amortization payments to be made on a “level-dollar basis,” which is initially more expensive than the level-percent-of-payroll basis used for an open plan. This “transition-cost” argument is dubious, however. The switch to a level-dollar amortization pattern does not alter the benefits ultimately paid, and in MSERS’ case, the state has generally failed to make the level-dollar amortization payments.”Michigan’s results have been so positive that proposals are in the works to close down defined-benefit plans for Michigan teachers as well. Their success has also sparked other states to close their defined-benefit plans (Nebraska being the most recent) or to incentivize their employees to voluntarily switch to 401k-style plans.Florida’s lawmakers should seriously consider the conclusion the Mackinac Center study makes: “These considerable savings and the fact that the plan is predictable, affordable and current in its obligations make it a model for reform of other state government pension plans.” This year, Florida’s pension reform package contained a provision to close defined-benefit plans in the Senate version, but was ultimately struck by the time it got to the floor. Don’t you think Florida legislators need to reconsider this concept next year?Check out Floridians for Sustainable Pensions for more information on government employee pension reform.