When Michigan restructured the pension plans of state employees in March 1997, the reforms contrasted with the state's former benefits plan for governmental employees, which was a "defined-benefit" plan. Under the current "defined-contribution" plan, all government workers hired after March 31st 1997 are responsible for contributing voluntary amounts to their individual retirement savings accounts, while the state makes mandatory contributions. Under the former system, the risk of investment was left with the state, and thus, with the taxpayers of the present and future. Michigan, along with other states, has adopted these policies to minimize the investment risks of the states, since defined-contribution plans shift the investment risk to the individual, and to ultimately lower costs.
The adoption of these reforms in Michigan began as a way to manage the lack of limitations set under the defined-benefit plans. With the implementation of defined-contribution plans, the state's cost of benefits cannot exceed seven percent of the current year's payroll. Governmental employees hired before the March 31, 1997 deadline are enrolled in the defined-benefit plan (unless they have opted to join the defined-contribution plan), whereas workers hired after that date have pension plans that are mandated into the defined-contribution category. The reforms were designed to compensate for a lack of fiscal requirements in defined-benefit plans, and as such, were intended to save current and future taxpayers a large sum of money; a feat that Richard C. Dreyfuss, an adjunct scholar with the Mackinac Center for Public Policy, suggests Michigan accomplished. Dreyfuss estimates that the defined-contribution plan had saved the state government a total of $167 million between its 1997 induction and 2010. Simultaneously, the new plan saved anywhere between $2.3-4.3 billion in lowered liabilities (Dreyfuss, 8). Although the amount is not quantified, he posits that the savings accrued from defined-contribution plans are much less susceptible to political interventions, and perhaps result in the largest total savings for the state. Due to these successes, Dreyfuss believes that the defined-contribution plans achieve the objectives set forth by policymakers (mainly lowering costs and shifting the burden away from taxpayers, all while limiting the impact of political interference), and argues that defined-contribution reforms as seen in Michigan should be a reformation model for other governmental pension systems.
The model for Michigan's defined-contribution reforms were partially based upon a public pension plan enacted in Washington in 1977. Under these reforms, Washington raised the retirement age, limited opportunities to inflate pensions with salary increases late in an individual's career, required most cost-sharing between employers and members, and also restricted access to the old plan from workers joining after its 1977 enactment. Washington's plan is somewhat of a hybrid between defined-benefit and defined-contribution plans (Gregoire). Florida, citing a desire to improve upon both quality of life and the financial security of its citizens, has made five proposals regarding pension reforms. Among these, the state wishes to make the defined-contribution plan the default option for any new employees that have no investment preference, they seek to limit employees switching between plans to only the first year of employment, would like to lengthen the defined-benefit plan investing period by two years (resulting in ten years total), and wish to increase the employee contribution rate to 4%, a 1% increase from current levels. As analyzed by the James Madison Institute, these reforms, if enacted, have the potential to save Florida from the financial disasters experienced by other states (Clendinen).
In Canada, provincial and territorial finance ministers are battling over increasing defined-benefit plans, adopting a private sector plan that is voluntary, or creating a hybrid of both of these plans. Persistent problems concerning the benefits provided to retirees who had lost their pensions due to corporate bankruptcy contrast with the arguments alluded to by members of the financial industry who suggest creating a "nanny state" provides too much intervention in a country that should have pensions based on a "sink or swim" economic model (Townson, 7). These concerns were also prevalent in discussions in Washington in 2011 as the state adjusted its focus on pension reform and realized that the current pension system is only sustainable if more reforms are enacted. Although large cuts were made in the late 1970s to modernize benefit plans, Governor Gregoire is proposing that the state also eliminate automatic benefit increases, renovate public pensions by disincentivizing retirement before age 65, close the retire-hire exception for higher education pensions, and also wishes to allow newly hired higher education employees the option to participate in one of the hybrid pension plans offered by the state (Gregoire, 1-2). The Organisation for Economic Co-Operation and Development argues that states will need to either increase the retirement age or require employees to retire with fewer benefits; otherwise these reforms will be unsustainable in nations with increasing life expectancies (OECD, 2).
Although defined-contribution plans have created net financial savings in Michigan and Washington, the benefits of these plans may not exceed the financial realm. In Canada, proponents of increasing the amount of defined-benefit pension plans argue that losses accrued to the individual due to corporate bankruptcy cannot be the deciding factor on an individual's retirement income. In the United States, voluntary contributions made by the individual may serve to decrease the amount of taxpayer and policymaker liability, but there is a greater susceptibility for one's retirement income to be lost in a fluctuating stock market. Bad investments, corporate bankruptcy, and a "sink or swim" model of pension reform may serve to expand the government's pocketbook and reduce the risk of taxpayers, but it also operates as a vehicle to increase the amount of prospective income lost by the individual, as well as having the potential to increase the financial burden of Michigan's governmental employees hired under the defined-contribution plan of 1997.
Clendinen, Tanja. "Public Pension Reform and Health Care Compacts." The James Madison Institute. 7 Dec. 2011. Web. 12 April 2012.
Dreyfuss, Richard C. "Estimated Savings from Michigan's 1997 State Employees Pension Plan Reform." Mackinac Center for Public Policy. 23 June 2011. Web. 12 April 2012.
Gregoire, Chris. "Reforming Pensions to Hold Down Costs." December 2010. Web. 12 April 2012.
Organisation for Economic Co-Operation and Development. "Pension Reform: the Unfinished Agenda." September 2007. Web. 12 April 2012.
Townson, Monica. "Options for Pension Reform." Canadian Centre for Policy Alternatives. April 2010. Web. 12 April 2012.