Unfunded pension liabilities are rapidly growing in most of Michigan's public employee pension plans (see some examples here and here), while increasing numbers of workers are retiring. The bottom line is that many people who are retiring now are going to receive benefits that were never properly funded. The blame for this underfunding falls on the employees' lack of contributions; employers' excessive promises and low contributions; and poor investment markets. The burden for covering all the unfunded liability falls on taxpayers, working public employees, and future public employees.
One way to remedy this problem is to start taxing the employees who are collecting pension benefits from plans that are significantly underfunded. We propose that when pension plans are underfunded by 10% or more, the beneficiaries would be taxed by their county, school district, or whoever manages the fund. Those who have pensions of $100,000 or more would pay 15% tax, those who have pensions of $50,000-99,999 would pay 10%, and those who have pensions of less than $50,000 would pay 5% until the pension fund became fully funded. The tax would be progressive so someone with a pension of $110,000 would be taxed 5% on the first $50,000, 10% on $50,000-$100,000 and 15% on all income above $100,000. The tax revenue would be earmarked to go directly to the respective pension fund. In this way, those who are receiving benefits that were not funded in the past are making at least some of the contribution that should have been made when they were working. Also, this way current employees and taxpayers are not being forced to pay for past underfunded pension promises. Beneficiaries who are receiving pension benefits from plans that are in good standing would be exempt from this tax, as the necessary contributions to fund their pensions have already been made.