beyond blue
Can Michigan Be a Model for Pension Reform?

Momentum is gathering in the Wolverine State to replace beleaguered blue model defined-benefit pension systems with the more sustainable 401(k) style plans that are the norm in the private sector. The Associated Press reports:

Struggling under the weight of pension and health care obligations, Michigan lawmakers appear ready to take another whack at public employee benefits — a move that reflects renewed determination to shift workers to 401(k)-style retirement systems, even if it happens in baby steps. […]

The proposals could serve as a national blueprint, and they will provoke a pitched battle with public unions that are desperate to preserve traditional benefits.

A large-scale switch to defined-contribution pension plans wouldn’t just stop the cycle of union lobbying, legislative over-promising and public budget-busting that has created a multi-trillion dollar pension crisis nationwide; it could also help improve the quality of the civil service. One effect of defined-benefit pension systems is to lock workers in place, preventing them from switching careers for decades if they ever want to see a cent of their benefits. (This in turn makes unions fight tooth and nail to make it as difficult as possible to replace underperforming public employees). Making those benefits portable would help make the public sector workforce more dynamic and merit-based.

Moreover, 401(k) style plans are conducive able to adjust to demographic changes. If a state or metro area has a booming population and economy, policymakers may think can afford defined-benefit pensions to be financed by future generations. But if the population (and tax revenue) stagnates unexpectedly—as happened in Michigan over the past two decades—then the government is still stuck paying massive pension bills for years to come.

Here’s hoping that the Rick Snyder administration in Michigan can beat back public unions and make this change, and that other states do the same before their pension time bombs take out funding for vital public services.

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