MI-SERA

Retirement Matters

April 2021

By Joanne Bump

Pension Trends — The State of Michigan Investment Board (SMIB) met in March for its Quarterly Investment Review of the State of Michigan Retirement System. The management of Michigan state pension investments is housed in the Department of Treasury. This work is important because nearly two thirds of State retirees’ pension payments come from investments with a smaller share coming from employer and employee contributions. In 2019, more than half of the pensions paid to Michigan’s State employees were $20,000 or less. Modest benefits are paid to retired teachers, public safety personnel, State employees, and others serving the public. The March meeting reviewed all of the State retirement systems, but also highlighted specific changes for State employee pensions.

Rate of Return — The combined systems paid out approximately $1.9 billion net of contributions over the past 12 months ending in December 2020. Long-term market returns have been strong. Since 1979, the annualized rate of return on the plan assets has been approximately 9.5 percent. Over the last ten years, the return on assets was slightly higher at 9.8 percent. Michigan’s return has outperformed its peers in all long-term time periods. Like the Michigan plan, the peers include public pension plans with more than $10 billion in assets. Compounding helps to grow the fund as you reinvest previous earnings over time. Compounding on the higher than the peer rate of return has added significant value over the years.

Maintain Liquidity — In 2020, COVID-19 impacted the economy as we suffered the sharpest recession on record, followed by a fastest-ever rebound. While much of the economy recovered in 2020, it was uneven. Vaccines and significant government stimulus have boosted the economic rebound for 2021. Nonetheless, industry experts anticipate that the rate of return for pension plans will be lower for the next ten years. Given this, retirement plans are reducing the assumed rates of return to lower levels. This means that the asset allocation will change to more secure investments that earn a lower rate of return. Michigan will continue to focus on the long term by maintaining adequate liquidity which is needed to pay pensions, as short-term markets fluctuate.

Fund Ratio — The State of Michigan Retirement Board (SMRB) met in March to review the State of Michigan Retirement Systems, including the Michigan State Employee Retirement (MSER) plan. It shows how much of the State employee pension costs are fully paid up. It gauges the health of a defined benefit pension plan and whether the fund has enough to pay out pensions. The “fund ratio” is the pension plan’s assets as a percent of liabilities on an actuarial basis. The fund ratio was 65.4 percent for 2019, the last year reported. Since 2015, Michigan’s fund ratio has consistently hovered around 65 percent. Like most states, Michigan has not completely funded the public pension systems but is making strides in that direction. The value of assets has benefited from significant long-term investment growth at pre-pandemic levels. The fund ratio provides a base line on how the MSER pension fund would have weathered a recession before COVID-19.

Pension Underfunding — Another indicator of how well the MSER plan is working was illustrated by comparing payments going into the fund from current employees and the employer vs. pension payments going out. While COVID-19 negatively impacted the Michigan economy last year, MSER declined slightly as pension benefit distributions or pay-outs exceeded new contributions. Fiscal Year 2020 MSER pension distributions of $1,837.9 million exceeded total contributions of $1,342.6 million, a decline of $495.3 million. This represents 4.1 percent of the fund’s total market value. Given the recession, this slowdown was understandable. The economic effects could have been worse without the unprecedented fiscal and monetary stimulus that has been sustaining the U.S. economy into 2021.

American Recovery Plan — In March, President Biden signed into law a COVID relief bill, providing $1.9 trillion in federal aid. Millions of Social Security beneficiaries were eligible for the $1,400 stimulus payments that were phased out at higher incomes. Those eligible to receive the full $1,400 included single adults who reported $75,000 or less in adjusted gross income (AGI) on their 2019 or 2020 tax return as did heads of household who reported $112,500 AGI or less. Couples filing jointly who earned $150,000 or less in AGI received the full $2,800. This stimulus payment included adult dependents, giving much-needed financial aid to family caregivers that seniors depend on. They were distributed in March. If you haven’t received a stimulus check but think you are eligible, contact your Congressional Representative for help.

The Earned Income Tax Credit (EITC) for childless people was increased for 2021 only to $1,502 from $542. The age cap that limits the EITC tax credit to workers under the age of 65 was removed to help seniors. Severely underfunded pension plans may get some protection on earned benefits of workers and retirees.

Significant funding was provided to help seniors and their families get through the pandemic safely including:

$7.5 billion – Vaccination distribution and administration
$46 billion – Test, contact trace, diagnose, and monitor the pandemic
$1.75 billion – Surveillance of new COVID-19 strains
$7.6 billion – Vaccine distribution and testing
$12.6 billion – Home and community-based services
$4.5 billion – Low-income seniors’ homes heated and cooled
$1.4 billion – Nutrition, vaccination, and caregiver supports for older adults
$700 million – Staff issues and infection control in long-term care facilities
$37 million – Food for seniors until September, 2022

Consumer Energy Rates — Michigan seniors on fixed incomes are among those that were impacted by increases in consumer energy rates. A nearly $100 million rate increase was effective in January 2021. Yet another $225 million increase is being considered. Four groups filed to oppose the rate increase including the Citizens Utility Board of Michigan, the Michigan Environmental Council, the Sierra Club Michigan Chapter, and the Natural Resources Defense Council. They argued against raising energy rates on struggling families during the pandemic after they were just increased last January 2021.

Editor’s note: Joanne Bump currently serves as feature columnist for “Retirement Matters.” Joanne can be contacted by phone at (517) 896-2729 or by e-mail at joannebump@gmail.com.

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April 2021 By Joanne Bump Pension Trends — The State of Michigan Investment Board (SMIB) met in March for its Quarterly Investment Review of the State of Michigan Retirement System. The management of Michigan state pension investments is housed in the Department of Treasury. This work is important because nearly two thirds of State retirees’ pension payments come from investments with a smaller share coming from employer and employee contributions. In 2019, more than half of the pensions paid to Michigan’s State employees were $20,000 or less. Modest benefits are paid to retired teachers, public safety personnel, State employees, and others serving the public. The March meeting reviewed all of the State retirement systems, but also highlighted specific changes for State employee pensions. Rate of Return — The combined systems paid out approximately $1.9 billion net of contributions over the past 12 months ending in December 2020. Long-term market returns have been strong. Since 1979, the annualized rate of return on the plan assets has been approximately 9.5 percent. Over the last ten years, the return on assets was slightly higher at 9.8 percent. Michigan’s return has outperformed its peers in all long-term time periods. Like the Michigan plan, the peers include public pension plans with more than $10 billion in assets. Compounding helps to grow the fund as you reinvest previous earnings over time. Compounding on the higher than the peer rate of return has added significant value over the years. Maintain Liquidity — In 2020, COVID-19 impacted the economy as we suffered the sharpest recession on record, followed by a fastest-ever rebound. While much of the economy recovered in 2020, it was uneven. Vaccines and significant government stimulus have boosted the economic rebound for 2021. Nonetheless, industry experts anticipate that the rate of return for pension plans will be lower for the next ten years. Given this, retirement plans are reducing the assumed rates of return to lower levels. This means that the asset allocation will change to more secure investments that earn a lower rate of return. Michigan will continue to focus on the long term by maintaining adequate liquidity which is needed to pay pensions, as short-term markets fluctuate. Fund Ratio — The State of Michigan Retirement Board (SMRB) met in March to review the State of Michigan Retirement Systems, including the Michigan State Employee Retirement (MSER) plan. It shows how much of the State employee pension costs are fully paid up. It gauges the health of a defined benefit pension plan and whether the fund has enough to pay out pensions. The “fund ratio” is the pension plan’s assets as a percent of liabilities on an actuarial basis. The fund ratio was 65.4 percent for 2019, the last year reported. Since 2015, Michigan’s fund ratio has consistently hovered around 65 percent. Like most states, Michigan has not completely funded the public pension systems but is making strides in that direction. The value of assets has benefited from significant long-term investment growth at pre-pandemic levels. The fund ratio provides a base line on how the MSER pension fund would have weathered a recession before COVID-19. Pension Underfunding — Another indicator of how well the MSER plan is working was illustrated by comparing payments going into the fund from current employees and the employer vs. pension payments going out. While COVID-19 negatively impacted the Michigan economy last year, MSER declined slightly as pension benefit distributions or pay-outs exceeded new contributions. Fiscal Year 2020 MSER pension distributions of $1,837.9 million exceeded total contributions of $1,342.6 million, a decline of $495.3 million. This represents 4.1 percent of the fund’s total market value. Given the recession, this slowdown was understandable. The economic effects could have been worse without the unprecedented fiscal and monetary stimulus that has been sustaining the U.S. economy into 2021. American Recovery Plan — In March, President Biden signed into law a COVID relief bill, providing $1.9 trillion in federal aid. Millions of Social Security beneficiaries were eligible for the $1,400 stimulus payments that were phased out at higher incomes. Those eligible to receive the full $1,400 included single adults who reported $75,000 or less in adjusted gross income (AGI) on their 2019 or 2020 tax return as did heads of household who reported $112,500 AGI or less. Couples filing jointly who earned $150,000 or less in AGI received the full $2,800. This stimulus payment included adult dependents, giving much-needed financial aid to family caregivers that seniors depend on. They were distributed in March. If you haven’t received a stimulus check but think you are eligible, contact your Congressional Representative for help. The Earned Income Tax Credit (EITC) for childless people was increased for 2021 only to $1,502 from $542. The age cap that limits the EITC tax credit to workers under the age of 65 was removed to help seniors. Severely underfunded pension plans may get some protection on earned benefits of workers and retirees. Significant funding was provided to help seniors and their families get through the pandemic safely including: $7.5 billion – Vaccination distribution and administration $46 billion – Test, contact trace, diagnose, and monitor the pandemic $1.75 billion – Surveillance of new COVID-19 strains $7.6 billion – Vaccine distribution and testing $12.6 billion – Home and community-based services $4.5 billion – Low-income seniors’ homes heated and cooled $1.4 billion – Nutrition, vaccination, and caregiver supports for older adults $700 million – Staff issues and infection control in long-term care facilities $37 million – Food for seniors until September, 2022 Consumer Energy Rates — Michigan seniors on fixed incomes are among those that were impacted by increases in consumer energy rates. A nearly $100 million rate increase was effective in January 2021. Yet another $225 million increase is being considered. Four groups filed to oppose the rate increase including the Citizens Utility Board of Michigan, the Michigan Environmental Council, the Sierra Club Michigan Chapter, and the Natural Resources Defense Council. They argued against raising energy rates on struggling families during the pandemic after they were just increased last January 2021. Editor’s note: Joanne Bump currently serves as feature columnist for “Retirement Matters.” Joanne can be contacted by phone at (517) 896-2729 or by e-mail at joannebump@gmail.com. Return to top of page
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