Reason Foundation

Reason Foundation

Pension Reform Case Study: Michigan

Reforms in Michigan have benefited both taxpayers and state employees

Anthony Randazzo
August 15, 2016

In 1996, the Michigan state legislature passed a first-of-its-kind bill that closed the state employees’ defined benefit pension fund to 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. Pension reform in Michigan has meant the State Employee Retirement system is more solvent today than if the legislature had not closed the defined benefit plan for new hires, with a full system funded ratio of 88% as of 2015, compared to an estimated 68% funded ratio without reform.

However, while Michigan provides valuable insights for how to pursue adopting pension reform—such as taking sufficient time to fully analyze a pension plan’s problems, avoiding conflict by communicating with all parties, and having determined elected officials leading the effort—the state has also provided an example of how not to manage the implementation of pension reform.

This 2016 update to our original study finds:

Anthony Randazzo is Director of Economic Research

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