As mentioned earlier, Michigan was the first state to shift its public-sector pension from a defined benefit to a defined contribution program. State employees hired after 1997 were automatically enrolled in a defined contribution plan. Under this system, employees‘ retirement accounts were individualized; the state now makes a mandatory payment plus a matching payment.
Employee contributions to the defined contribution plan are both voluntary and pre-tax. All workers receive a 4-percent state contribution, and they are free to contribute up to 20 percent on a pre-tax basis. The first 3 percent of salary contributed by workers is matched by an additional 3 percent state contribution. In other words, if employees contribute just 3 percent to their 401(k), the Michigan program raises the contribution to the important 10 percent savings level mentioned above.
Michigan‘s program has been popular among participants, and it has produced enormous cost savings for the state. As a result of its popularity, the program expanded in 2010 to include K–12 teachers in a combined defined benefit/defined contribution program. Since 1997, the shift to a defined contribution plan has saved Michigan—a state strapped for revenue and losing productive residents year after year—more than $4 billion. Unlike defined benefit plans, which are frequently underfunded, Michigan‘s program is fully funded and employees have never missed out on a payment. Members of the Michigan State Employees Retirement System defined benefit plan prior to 1997 are still being paid, but Michigan‘s reform has seriously reduced unfunded liabilities and saved taxpayers billions of dollars.