Commentary

Converting Government Pensions To Real Pensions

By Aaron Steelman
May 19, 1998

Senator Daniel Patrick Moynihan (D-N.Y.) has recently called for cutting Social Security taxes and permitting workers to invest the money they save in individual retirement accounts. If the feds have the sense to follow this path, they’ll once again be following the lead of more daring state efforts.

Michigan has been the leader of such reform. Under its new system, the state contributes 4 percent of the worker’s salary into an individual retirement account and will match another 3 percent. The worker also may contribute an additional 13 percent that will not be matched by the government.

According to state legislator Donald Gilmer, the reform has two virtues. First, “the old system simply wasn’t sound from an actuarial standpoint.” Plus, under the old system — in which state employees needed ten years on the job to become fully vested — “over 60 percent of workers never drew a dime of benefits. And that seemed to me to be fundamentally unfair.” Under the new system, an employee is fully vested after four years and can take the money he and his employer have contributed with him should he leave his job.

Such a change, Gilmer argues, is family friendly. “The old system discriminated against women because they are the ones who get pregnant and often have to leave their jobs. We were punishing people for choosing full-time parenting.”


Lawmakers in Washington should pay close attention to the strides Michigan has made, because, as Rhead says, “if we look at it realistically, making Social Security a defined-contribution system is our only hope.”


Opposition to the change came from a predictable source: labor unions. The teachers’ unions were ultimately successful in excluding their members from the reform — a perverse outcome, given that two-thirds of such employees never received benefits under the old system. But their arguments didn’t resonate with the public. Kim Rhead, principal sponsor of the bill, explains that reform opponents argued “that people are too stupid to take care of their own pensions. That just isn’t true. Many people who aren’t rocket scientists have defined-contribution plans and are flourishing under them. They have no problem knowing what to do.”

Lawmakers in Washington should pay close attention to the strides Michigan has made, because, as Rhead says, “if we look at it realistically, making Social Security a defined-contribution system is our only hope.”

Aaron Steelman is a staff writer at the Cato Institute.