Defined Contribution System And
Graded Premiums for Health Benefits

Under House Bill 4947 (Palmer, R-Romeo), all new education employees would be forced to become members of a defined contribution pension plan, rather than a defined benefit pension plan, and would pay at least 10 percent of their retirement health care costs.

The bill would amend the Public School Employees Retirement Act to replace the defined benefit retirement system with a defined contribution retirement system, beginning July 1, 2006. Employees who were hired prior to this date would continue to be part of a defined benefit retirement system, although they would have the option of electing, instead, the defined contribution retirement system.

The Public School Employees' Retirement System (MPSERS) provides a pension and health insurance to nearly a half-million people--more than 338,000 active members, and about 150,000 retirees and beneficiaries. This includes public school employees, community college employees, and employees of some universities. The MPSERS plan is administered by the Office of Retirement Services in the Department of Management and Budget.

Currently, the traditional defined benefit pension system guarantees a lifetime pension benefit for those employees who are "vested" in the system (those who have at least 10 years of service), and the amount is based on a formula that multiples the employee's years of service times his or her final average compensation times 1.5 percent. Generally speaking, the system is funded by contributions made by employing school districts on behalf of their employees. The portion of the system devoted to pensions is actuarially calculated to ensure that the system has enough assets to pay benefits to current retirees. The portion of the system devoted to health care has been funded on a pay-as-you-go basis for about the last decade.

By contrast, in the proposed new defined contribution system, a school district would contribute a fixed amount to each employee - 4 percent of his or her salary, plus a matching contribution of up to 3 percent, if the employee contributed an equal amount. Thus, a school district's contribution rate would remain steady at 7 percent (at most) of payroll. (An employee could contribute an additional 3 percent, but that would not be matched by the employer.) The employee would take responsibility for investing his or her own account in a 401(k)-style plan, and bear the risk of whether the amount invested would grow enough to provide an adequate retirement income. The employee would be fully vested in the employer match funds after four years.

House Bill 4947 would also create a graded premium for the health insurance coverage provided to retirees. After 10 years of service (but less than 30 years), the retirement system would pay a portion of the monthly premium equal to 3 percent times the member's years of service. The amount covered would increase by 3 percent annually, up to 90 percent coverage after 30 years of service.

Under the bill, purchased credits would count toward vestment in the pension account, but not toward coverage for health care. Current school employees would have until July 1, 2007, to decide whether to remain in the current system or convert to the defined contribution plan.

Talking Points:

House Bill 4947 is currently awaiting action on the floor of the House. This bill is opposed by AFT Michigan because:

• Defined contribution plans will make school employees vulnerable to the ups and downs of the stock market instead of being able to count on a secure retirement.


• Those retirees and employees already in the defined benefit plan would remain in a "dying" pension system, which could create challenges in investing the funds and seeing that members' benefits are protected.


• The current defined contribution helps to attract and retain well-qualified school employees.


• Graded scale premium institutes a retiree health care plan that will place health insurance costs out of the reach of many retired support staff, as well as retired employees who have taken time off for family purposes.


• It will probably take a decade for the graded scale premium to create cost savings, and the cost of setting up a new defined contribution plan will eat up the cost savings.

Remember: The defined contribution plan you currently have guarantees you a pension for as long as you live. Under this proposal, you could outlive your investment, especially if the markets have a bad spell.

bk:opeiu42aflcio: February 21, 2006