Defusing New York's Pension Bomb

New York State and its local governments, including New York City, provide their employees with constitutionally guaranteed pensions based on workers’ peak salaries and career longevity. This defined benefit (DB) system requires government employers to contribute annually to retirement funds to cover future pension payments. But their contributions vary depending on actuarial assumptions and market fluctuations. Earnings during bull markets reduce employer contributions, while losses during bear markets can force governments to drastically increase contributions. Since bear markets usually coincide with recessions, DB pension plans force governments to spend more when they are least able to afford it. The financial complexity of the DB system has made it all too easy for elected officials to ignore or misrepresent the true costs of pension benefit increases for government workers.

This study shows how greater fairness for New York taxpayers and competitive retirement benefits for government employees can be achieved by switching from the current defined benefit (DB) pension plan to the savings-based defined contribution (DC) model used by the vast majority of private companies. A DC plan guarantees that a set amount of money will be put aside for retirement out of every employee’s paycheck, while making the ultimate retirement income dependent on how much is saved and on returns from investment over the employee’s working life.

Under the plan proposed here, government employers in New York would deposit a minimum of 5 percent of each worker’s salary into a retirement account, to be matched by a minimum 3 percent employee contribution, bringing the total minimum retirement savings to 8 percent of salary per year. Employers would match up to 2 percent of additional employee contributions, raising the employer-matched minimum savings to 12 percent of salary. The recommended DC plan would effectively cap employee retirement costs at 7 percent of pay, which is less than the rate at which employers are now billed for members of the New York State and Local Retirement System.

In a DC retirement system, taxpayers would no longer bear all the financial risks associated with providing guaranteed pension benefits. Public pension costs for the first time would become both predictable and easily understandable, and the real costs of proposed benefit increases would be completely transparent.

READ FULL REPORT HERE