In 1996, the Michigan state legislature passed a first-of-its-kind bill that froze the state employees’ defined-benefit pension fund for new members and created a defined-contribution pension system for future hires. Members already in the defined-benefit system were allowed to remain and their benefits continued to accrue as originally promised, though the workers were given an opportunity to take a buyout of their earned benefits and have those transferred to a defined contribution account. New workers had their pension contributions put into personal accounts that they could manage on their own and take with them if they left employment with the state.
Given that the state employees’ defined-benefit fund had a relatively healthy funding ratio at the time, this was an unusual move. But in retrospect, the decision seems highly prescient.
When the Michigan legislature did not vote to reform the public school employees’ pension fund, which was operated in the same way as the state employees’ defined-benefit system, they inadvertently created a natural experiment to determine which system would be more sustainable in the long run.
This study finds that over the past 15 years, the public school employees’ plan accrued unfunded liabilities that would have likely been mirrored by the state employees’ fund in the absence of a defined-contribution option. This would have increased fiscal pressure on current state leaders and made Michigan worse off on the whole.