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Commentary By E. J. McMahon

NY, Seek a Smarter Pension Reform

Cities, Governance, Economics Tax & Budget

Labor unions in New York are mounting a fierce effort to derail Gov. Andrew M. Cuomo's Tier 6 pension reform plan, portraying it as an attack on the middle class.

The unions are predictably unhappy with Cuomo's attempt to pare back defined-benefit pensions for future workers. However, they seem equally upset with the governor's proposal to let new employees opt into a defined-contribution retirement plan like the 401(k)s increasingly prevalent in the private sector. Joined by state Comptroller Thomas DiNapoli, the sole trustee of the state pension fund, the governor's labor critics categorically reject the defined-contribution option as both inadequate and insecure.

In reality, all defined-contribution plans are not created equal. A report issued today by my organization, the Empire Center for New York State Policy, highlights the benefits of a popular optional defined-contribution retirement program initiated almost 50 years ago by the State University of New York and subsequently emulated by the City University of New York.

The SUNY and CUNY plans differ from a typical 401(k) in several key respects -- most important, in their focus on accumulating savings through annuity contracts, which mimic a traditional pension by promising a stream of post-retirement income through a private insurer. Annuities are designed to protect against the risk that retirees will outlive their savings. That's why the Obama administration has been seeking to encourage use of annuities in 401(k)s.

While employees in a defined-contribution plan don't have the taxpayer-guaranteed security of a traditional pension, they have a benefit they can take elsewhere. Participants in the SUNY and CUNY plans fully "vest" in their plans after just one year. The vesting period for traditional pensions is 10 years, which Cuomo's plan would increase to 12.

Small wonder, then, that roughly 75 percent of the faculty and other professionals at SUNY and CUNY have chosen the defined-contribution option. College professors are an especially mobile lot, but they are hardly the only government workers who covet some career flexibility. During the five years ended 2010, nearly 110,000 people left jobs in New York's state and local governments outside New York City before vesting in a pension plan. They could only withdraw their own pension contributions, plus 5 percent interest (which was three full points below the systems' assumed rates of return at the time).

Portability can be valuable. A defined-contribution account can ultimately translate into well more than $100,000 in added end-of-career retirement savings for a worker who leaves a government job before the 10-year vesting point of a traditional pension.

Workers who put a premium on pension portability wouldn't be the only beneficiaries of a turn toward a defined-contribution model by New York State. Taxpayers in general -- including, of course, the middle class -- would gain from the greater financial transparency and predictability of defined-contribution accounts.

The defined-contribution provisions of Cuomo's Tier 6 bill are a good start, but could use improvement. The minimum annual contribution should be higher than the 4 percent he proposes, and the plan design should be fleshed out.

Instead of bemoaning the defined-contribution trend in the economy at large, New York's union leaders should be helping Cuomo and the legislature shape the kind of flexible retirement plan 21st century workers need. By stubbornly insisting on no deviation from an unsustainable status quo, the unions are doing a disservice to the people they claim to represent.

This piece originally appeared in Newsday

This piece originally appeared in Newsday