Posted on 05/02/2016 12:32:58 PM PDT by MichCapCon
In 2012, the Michigan Legislature passed a bill that kept open the teacher pension system but began allowing school employees to choose a 401(k)-type defined contribution retirement account.
Since then, around 18,000 school employees have chosen the 401(k) instead of the old pension system, according to a FOIA request. Their reasons for making the switch range from concerns about future pension cuts and underfunding to wanting more control over retirement funds.
“I chose the defined contribution option for a number of reasons. One of which … [is] the pension program is underfunded and may or may not be existent when it comes my time to collect,” said Adam Hastings, a math teacher at Athens High School. “ I also was told that the 401(k)-type option was more portable under the circumstance that I should decide to move to another state.”
School employees do not “vest” in the pension system until they have worked for 10 years, which was also noted by Amy Graham, who works for the Barry County Intermediate School District.
“I work for a grant-funded program and am concerned with how long it takes people to be eligible for benefits,” Graham said.
Having more control over finances and not trusting the state to fully fund the system were two other reasons school employees have mentioned.
“It put me in more control of my own money,” said a science teacher in a rural school in the Upper Peninsula, who did not want to be named. “It seemed like a higher risk/higher rewards type of investment and I figured that I'd like to play the long-term trend in the stock market and hopefully come out ahead. It made me feel more independent and less dependent on the state, which I don't necessarily trust to follow through on all its promises.”
Bridget Weise-Knyal, a paraprofessional with Ann Arbor Public Schools, said she believes Republicans have cut pensions, “making them less reliable.” Michigan’s teacher pension system has not been fully-funded for around 30 years.
“I'm uncertain how long I'll be working in the district and I have always had 401(k) plans or 403(b) plans at other employers and am comfortable with the flexibility and control that affords,” Weise-Knyal added. “I feel it's less vulnerable in the long run. Pensions seem to get targeted for cuts more and more. I do not feel as secure with pensions.”
Around 35 percent of the cost of every school employee currently goes to retiree benefits. The vast majority of that goes to make up for past pension underfunding.
Connie Hamlin, an elementary school teacher at East Leroy Elementary in Athens, has been with the district for 36 years. Three years ago, she opted out of the pension system so that she could have something to leave to her family.
“I’m not married and I found out that if something happens to me, [my pensions] would go back into the system,” Hamlin said. “I just decided I wanted to have something to leave to my beneficiaries. It won’t be tons, but it will be something.”
The state’s school employee pension system, known as the Michigan State Employees' Retirement System (MPSERS), is underfunded by $25.8 billion. (That’s the difference between how much has been promised to pension system members and how much should have been saved to cover the promises.) Michigan state employees and many local governments have shifted new employees out of a pension system and to a 401(k)-type plan.
The city of Detroit cut pensions for retirees in 2013 after filing for bankruptcy — largely due to an overwhelming debt of pension obligations. Unlike pensions, defined contribution, 401(k) accounts go to employees immediately and cannot be underfunded.
The Legislature is currently considering shifting future school employees to a 401(k) to prevent future liabilities and protect current employees and retirees. House Bill 5218 and Senate Bill 102 are in the appropriations committees of their respective chambers.
A fully vested 401(k) v. a pension = a bird in the hand is worth two in the bush (for now, anyway).
I tried to explain to a friend that if a government entity goes broke, civil pensions can get cut. She refused to believe me.
The funds that have been put away for pensions are usually remote from bankruptcy, and won’t become part of creditors’ settlements. But so many public pension funds are underfunded because of inflated return estimates that the funds may not be sufficient to pay the calculated benefits that the recipients are expecting.
Not sure if it will matter anyway: our boys and girls in Congress are salivating right now at the $19+ trillion in 401K/IRA money.
Think the money you deposit in the bank is yours? Take some time and see what was decided on in the last G20 meeting.
Also notice our good friends in talk radio and fox had little to say about that - too busy being PC.
Take for example..and I'm using round numbers here to make my point....a 55 y.o. male teacher who retires today after 30 years of service. He has a vested pension of $5,000/month. The commuted value of his pension..IOW, the lump sum amount it represents..is about $1 million. Say he's single....gets one check, retires...gets hit by a bus...there's nothing left. Say he's married, has a 50 y.o. wife..wants to give her some security..instead of getting $5K/month, he settles for $4k...if he dies, his wife gets $2K/month as long as she lives..then nothing for the kids...whereas, had the teacher had a DC plan from day one...and invested in a diversifed fund..he'd likely have far more than $1 million..and gets to keep it all..enjoy a BIGGER retirement, and leave it to the kids and grandkids...
Understand that your numbers were just for illustration purposes but that example teacher would have had to have been paid $100k/yr for the past 5 years in order to qualify for that kind of pension here in OK. It may be reality somewhere but definitely not here. Again, I understand, just an example.
Your point about DB vs. DC is right on the mark and at least the MI teachers have a choice. No choice here but you can supplement with a 403b/457 and the district where I work also adds a match up to a certain percentage. Fairly generous, all things considered, since the district fully pays the retirement contribution.
Love your tagline — there are less and less of us around here who even get it.
Could it be that they don’t want their retirement accounts stolen? Hmmm?
Workers in the private sector end up rich with the 401K. Government employees get 2,000 a month while the civilian workers have a million to work with. Much better for civilians.
Thanks for the tagline bump....sad, isn't it..how this place has changed.
Homeopathy aside, diluting (purging) a potion hundreds of times, leads to mostly water. Same for forums.
I had the choice and chose a 403(b) plan-the equivalent to a 401(k). The 403(b) is for colleges, universities, research institutes such as the Jackson Lab in Bar Harbor, ME, and other non-profit organizations.
Many districts have DB plans, and teachers are still allowed to defer up to 20% of their salary into a 403(B).
I contribute 7.5% of my income (before tax) with a matching contribution from my employer of 7.5%. My contributions vest immediately, the college’s after 2 years. The vesting requirements for the state pension fund were 10 years when I started work-now it is five.
I assume I would work at this college for four or five years and then leave, so I chose the 403(b) plan. Now in my 26th year, the state plan would have been better, but it has been raided several times by the legislature.
Yes. I am in a union, and my pension is safe from creditors. I am glad I am not in the public sector.
And no one I work with is a slacker. They would get their butt’s kicked if they were.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.