Earlier this week I spent the better part of an hour talking about pension reform with John Engler, former Michigan governor and now the president of the D.C.-based Business Roundtable. This was an interview for a forthcoming paper on making the transition from the defined benefit to defined contribution model of public pensions. Engler is remembered as the very popular three-term governor of Michigan and someone who made Bob Dole’s shortlist in 1996 to be the GOP vice presidential candidate. But few know the story about how he transformed the pension system for Michigan state employees well before state retirement funding became a national crisis.
How did he do it? Engler says he and his staff spent the better part of a year getting organized to make their argument for this reform. “There was technical work to do so you had to prepare correctly,” he said. One of the things his administration found was that about half of state workers didn’t even have enough tenure to qualify for the DB plan. During the legislature debate, he and his staff made the arguments that the DC model was the way of the future. It was a “flexible, funded system” where “employees could start saving for retirement on day one.”
This reform effort in 1996 also came in the context of a bull market, which Engler believes added to the appeal of individual retirement accounts be enabling participants to have more control over their investment allocation. While many of Michigan’s largest employers were running massive DB plans at the time, he notes that they did not get involved in this issue. The debate was focused in the legislature rather than in the public sphere. The reform bill only garnered significant attention when it passed in the lame duck session on a close vote (a plan to change the teachers’ retirement system in the same way — which Engler says he devoted even more attention to — lost by two votes).
Michigan in 1997 became the first state to close a large DB pension plan and replace it with individual accounts. The Mackinac Center has analyzed how much this has saved the state — around $167 million in normal cost and $2.3-$4.3 billion in unfunded liabilities. Fifteen years later, many states are considering legislation to do the same thing. The mix of preparation, lobbying, and vision that Engler brought to bear is a story every would-be reformer should know. More to come in detail in the white paper.
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