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The retirement system is funded by employer and employee contributions and by the investment earnings on those contributions. All contributions are a funding source for pensions and healthcare, and they do not result in additional individual benefits.
When your pension payments begin, payments are first made from the personal contributions you paid into the system during your career. After these funds are exhausted, payments are made from the retirement system throughout the rest of your life.
Who Contributes What
Each year an actuary determines how much the State of Michigan needs to contribute to fund its portion of member benefits. These contributions are not refundable to you or your employer.
Your DB pension contributions.
As an active contributing member of the Defined Benefit (DB) plan, you also contribute 4 percent of your salary to the pension reserve fund.
Your DB pension contributions and employer contributions go into the reserve fund used to pay all monthly pensions, but we keep a separate account of your DB pension contributions. We do this for a couple of reasons:
- Taxability. DB pension contributions you make on a tax-deferred basis will become taxable when you receive pension payments. We need to be able to tell the IRS how much of your pension is taxable at retirement, and how much you've already paid taxes on.
- Interest. DB pension contributions earn interest, and different rates apply depending on the type and time of the contribution. Ordinarily, this will only be important if you terminate employment and take a refund of contributions.
- Refunds. If you leave the retirement system before you're eligible for a pension, you can ask for a refund of your DB pension contributions, forfeiting all your rights to a monthly pension.
Because we keep detailed account balances and provide them to plan members, they often think that they'll get this amount over and above their calculated pension when they retire. This is not so. It is only when you leave the system before you're eligible for a pension that DB pension contributions could be refunded. For more details, see Leaving State Employment.
You earn interest on your DB pension contributions.
As your employer forwards your DB pension contributions to ORS, we credit your account. At the close of each fiscal year, we also credit you with interest on DB pension contributions on account for a full year. The interest rate on these contributions varies because it is statutorily determined each year based on the rate of investment return.
If you purchased service credit or have any post-tax contributions from years when the plan was contributory (before July 1, 1974, and after March 31, 2012), we will keep track of those DB pension contributions separately. These funds earn 3.5 percent interest after they have been on account for a full year. Interest is posted on January 1 of each year.