Governance, Cities Pensions, New York City
October 15th, 2020 39 Minute Read Report by John Hunt

Reforming New York City’s Public Retirement System

For years, the Manhattan Institute has warned about the unsustainability of New York City’s public retirement system. Even before the Covid-19 pandemic, the city was on a dire trajectory. Now, the city's financial future is particularly vulnerable and uncertain, with its population base, economic performance, and property values all facing unprecedented pressure.

Failure to reform the public pension and retirement health-care systems poses three risks: crowding out other priorities, breaking promises to retirees, and blunting the city’s competitiveness. Crowding out other budget priorities would mean shortchanging important municipal services. Breaking promises to current and future retirees would mean reneging on the promised benefits that they built their lives around. Blunting the city’s competitiveness would mean inducing tax hikes, benefit cuts, or wage freezes that would leave the city unappealing to new prospective residents and employees.

This report will make four broad recommendations. First, the city offers unusually generous post-employment health-care benefits. Paring these benefits back to the prevailing standard in the private and public sectors would dramatically improve the city’s fiscal position. Second, the city, enabled by future state legislation, should transition the pension plans of new employees in the direction of a defined-contribution system. That means developing mixed approaches tailored to the city’s various workforces that will deliver security to retirees while maintaining long-term fiscal sustainability and helping to recruit a talented workforce. Third, if the city implements an early retirement initiative, it should target those incentives to the areas where Covid-induced innovations have reduced the needed headcount. Fourth, consolidating asset managers across the city’s five separate pension funds would reduce overhead and encourage sounder investment strategies.

I. Introduction

For years, the Manhattan Institute has warned about the unsustainability of New York City’s public retirement system. “Pension contributions stand at a near-record 11% of the city’s total budget—and 36% of payroll alone,” wrote E. J. McMahon and Josh McGee in 2017. “They consume 17% of city tax revenues, double the average proportion of the 1990s and early 2000s…. [W]hen the next downturn strikes, it will inflate the pension deficit, creating even bigger burdens and more difficult choices.”[1]

The time for difficult choices is now. Sitting at the epicenter of a global pandemic and urban unrest, New York City’s financial future is particularly vulnerable and uncertain, with its population base, economic performance, and property values all facing unprecedented pressure. The prospect of less revenue flowing into city coffers seems especially daunting, considering the scale of the city’s obligations to its retired public workers, current and future, raising the prospect of past promises crowding out future services. This issue brief offers a range of options for reforming New York City’s public pension and retirement health-care systems. Combining long-overdue reforms with new responses that are specific to this crisis, it identifies strategies that will help the city manage the risks posed by its looming liabilities.

The risks are threefold: crowding out other priorities, breaking promises to retirees, and blunting the city’s competitiveness. Crowding out other budget priorities would mean shortchanging important municipal services. Breaking promises to current and future retirees would mean reneging on the promised benefits that they built their lives around. Blunting the city’s competitiveness would mean inducing tax hikes, benefit cuts, or wage freezes that would leave the city unappealing to new prospective residents and employees.

These potential problems are fast approaching, unless action is taken. Even before the pandemic, the city was on a dire trajectory. In their 2017 paper, McMahon and McGee pointed out that “during Mayor Michael Bloomberg’s 12-year tenure, New York City’s annually required pension contributions more than quintupled, from $1.4 billion to $8.1 billion.” [2] By fiscal year 2019, the city’s contribution had grown to $9.8 billion.[3] This huge expense consumed approximately a third of all payroll expenses and a tenth of the total budget.[4] Now, the recent downturn in the stock market means that, over the medium term, these contributions will grow in absolute size, even as the city’s revenues decrease. Were the value of the pension funds’ assets to shrink by 5%, the city’s pension contribution would have to be $183 million greater for 2022 and 15 years thereafter. Were the value of the pension funds’ assets to shrink by 10%, the city’s pension contribution would have to be $259 million greater for 2022 and 15 years thereafter.[5] These will pose a significant impediment to helping stand the city back on its feet.

Meanwhile, the city has spent over half the money it had saved to cover Other Post-Employment Benefits (OPEB) expenses, and the remaining funds are likely to be spent down completely if current economic conditions persist.[6] Regardless of whether these savings become completely depleted, it is apparent to all that the city has no long-term strategy to cover its $100 billion projected OPEB liability.[7] That lack of planning will force the city to make ever greater contributions each year going forward.

Addressing these shortfalls through tax hikes is likely unwise at a time when the city is already struggling to keep its residents from leaving, much less attracting new people. The public understands that tax hikes are imprudent. A recent poll commissioned by the Manhattan Institute found that 75% of New Yorkers think that taxes are already too high. When asked what should be done about the current fiscal crisis, tax hikes were by far the least popular option (garnering a mere 11% approval rate).[8]

Unfortunately, solutions to this problem must be circuitous. New York is one of the few states with a constitutional requirement prohibiting amendments to any existing public-employee pension plan. This provision all but guarantees the pension plans of current employees. So while there is a strong case for amending the state constitution to allow a greater range of reforms, it is important to explore what options are currently available to the city.[9]

Pensions are distinguished from OPEB. The largest OPEB costs are health-care coverage for retirees, but the city also contributes to union welfare funds, which can assist with retirees’ vision, dental, and legal needs. OPEB is not subject to the same constitutional protections as pensions, offering greater flexibility for reform.

For reforming pensions themselves, it is important to distinguish between defined-benefit and defined-contribution plans. A defined-benefit plan guarantees retirees a certain amount of income each year after they stop working. A defined-contribution plan gives workers a certain amount of money each year while they are still working and allows them to invest it and build up savings sufficient for them to retire. Almost all retirees from New York City’s government receive a defined-benefit pension, OPEB, and Social Security payments. Five pension systems in New York City cover public employees, teachers, and uniformed personnel.[10]

This report will make four broad recommendations. First, the city offers unusually generous post-employment health-care benefits. Paring these benefits back to the prevailing standard in the private and public sectors would dramatically improve the city’s fiscal position. Second, the city, enabled by future state legislation, should transition the pension plans of new employees in the direction of a defined-contribution system. That means developing mixed approaches tailored to the city’s various workforces that will deliver security to retirees while maintaining long-term fiscal sustainability and helping to recruit a talented workforce. Third, if the city implements an early retirement initiative, it should target those incentives to the areas where Covid-induced innovations have reduced the needed headcount. Fourth, consolidating asset managers across the city’s five separate pension funds would reduce overhead and encourage sounder investment strategies.

II. OPEB Reform

Reforming the city's post-employment health benefits is likely to yield significant savings for the city. Of 13 potential cost-cutting measures proposed by the city’s Independent Budget Office (IBO) in 2018, six were either entirely or in part OPEB reforms.[11] New York City’s OPEB liability of $132,464 per employee is the highest of any major city in the country, ahead of both Los Angeles (which comes in second, at $126,457) and Boston (a distant third, at $86,327 per employee). In 2016, these liabilities amounted to $30,000 of debt for each household in New York City.[12]

Since then, the situation has only gotten worse. According to a recent assessment by the state Financial Control Board, in fiscal years 2020 and 2021, the city was forced to spend $2.641 billion and $2.668 billion, respectively, in pay-go financing of OPEB (meaning that they needed to use today’s revenue to cover today’s costs).[13] The city resorts to pay-go financing when it has not made adequate investments to finance OPEB costs. Ideally, funds should be saved when obligations are undertaken, not diverted from general revenues as those obligations need to be paid out. By depositing funds ahead of time, the city could follow a long-term investment strategy that would lower the burden to taxpayers, as it attempts to do for pension costs.

The current strategy for funding OPEB, such as it exists, is called the Retiree Health Benefits Trust (RHBT), which operates under a very different ethos from the city’s pension funds. Pension funds, at least hypothetically, aim to be fully pre-funded and often take on the ambitious task of achieving 7% returns year after year in their effort to catch up to those goals. RHBT faces less pressure to catch up and invests mostly in safe, liquid assets with smaller yields. It functions as a piggy bank—where funds are collected in good times to help cover lean years—as opposed to a careful investment plan aiming to meet projected costs decades out. The downside is that a prolonged spell of bad years will leave the city with no buffer. That exact danger is on the horizon. The city is aggressively drawing down funds from RHBT, which is down to just 44% percent of its precrisis value. Should the current downturn persist, RHBT could easily become entirely depleted.[14] The city would be forced into pure pay-go financing, at great expense. Something needs to change.

Luckily, there is substantial room for reform. While OPEB is mostly about health care, there are additional fringe benefits. The various municipal unions have welfare funds that, depending on the circumstance, can cover retirees’ dental, vision, or legal needs; in 2017, the city contributed $1,600 to nearly $1,800 for each retiree to these union-run funds.[15] New York State offers none of these benefits to its retirees, so there is a reasonable case for halving or eliminating the city contribution to these funds.

A more modest reform would involve consolidating the administration of these funds. Currently, the city is running 63 parallel welfare funds. IBO has outlined a consolidation proposal that would reduce the significant overhead in the system, which costs about $180 per member per year. It estimates that this reform could save the city $14 million each year. However, most of the costs, and thus most of the potential savings, come from health care.[16]

The OPEB health-care system has three main components. First, for almost all retirees under 65, the city pays the entire premium for health coverage, equivalent to the insurance that they received while working. This commitment costs approximately $7,200 for individuals and $17,600 for families annually. Second, the city buys Medigap (supplemental insurance meant to cover some of what Medicare misses) for those over 65. This supplemental insurance costs $1,900 for individuals and $3,900 for families. Third, the city fully reimburses the Medicare Part B premium. (Part B covers a swath of important medical services, ranging from preventive care to ambulance services.) Depending on the retiree’s income, the premium can vary between $1,608 and $5,143 annually.[17]

This system was designed at a time when employer coverage for the retired was more common. At that time, employees might stay at one company for their entire career, so a lifetime compensation plan was more usual. Since then, Medicare has transferred most of that responsibility to the federal government. Furthermore, subsidized Obamacare insurance was made available to those under 65. However, as society has changed, New York City’s health-coverage policies have not. The fact that substantially smaller OPEB health benefits prevail everywhere else demonstrates that these benefits are no longer needed to recruit a talented workforce. New York City’s complex concoction of benefits is highly unusual, even for public employees of major metros.

For example, only two cities in the entire country (L.A. and Boston) offer any type of Medicare Part B reimbursement, and neither offers anything close to New York City’s promise of a blank check covering the entire premium. In fact, aside from New York City, only one other public employer in the entire country (L.A.) pays the full premium cost for retirees’ health insurance. New York City is also unique in offering vision or dental insurance, which is covered by the union welfare funds. New York State provides no such benefits.

Compared with the private sector, the city is even more of an outlier. Only a small minority of New York’s employers (10%) offer any type of health-insurance subsidy to retirees under 65, the expensive pre-Medicare population.[18] Most employers have not found these benefits necessary to recruit a talented workforce.

Meanwhile, health-care cost inflation has meant that the city locked itself into commitments that no one envisioned taking on when building the system. For example, when the city decided to start paying for Medicare Part B, the premiums cost $4 per beneficiary per year. Those premiums can now cost the city anywhere between $1,608 and $5,143, with those numbers only likely to rise further.[19] The city needs to rethink these commitments lest legacy policies crowd out the city’s present needs.

Three areas for OPEB reform stand out: reserving benefits for those who need them most, making targeted cuts, and setting aside a trust to care for workers’ health.

Reserving OPEB for People Who Need It

It is important to remember that not all retirees depend on OPEB. For example, people who have spent most of their career elsewhere should have retirement savings from their previous employment sufficient to provide for themselves. However, in the current system, people who have worked in city government for just 10 years are entitled to benefits. According to IBO, merely increasing that requirement to 15 years for new employees would “save $12 million in 2029, growing to $37 million in 2031.”[20]

Then there are retirees who are otherwise eligible for OPEB but have an alternative source of coverage. Retirees who have coverage from a subsequent employer or a spouse’s health plan, for example, are required to use that coverage instead of OPEB. The question is whether that rule is followed. Since the city’s coverage is so generous, there is a strong incentive for retirees to use their OPEB coverage even when they should be on an alternate plan. While the degree of compliance (or noncompliance) with this policy is not currently well known, it is worth looking into. Past investigations of health-care fraud have uncovered substantial problems. In 2018, New York State investigated the practice of out-of-network health-care providers seeking reimbursements for cost-sharing that they had waived. Out-of-network providers would attract patients by waiving their cost-sharing expenses but still bill the state as if they hadn’t. They conducted “35 audits and found that 32 of 35 out-of-network providers routinely waived Empire Plan members’ out-of-pocket costs, which caused $22.8 million in overpayments.”[21] They guess that millions more dollars were lost to this abuse that they didn’t document but that could be prevented with a tighter enforcement of the rules. An investigation into NYC’s OPEB system might yield even more significant savings. The under-65 population is the most expensive to insure (as they lack Medicare), but they are also the most likely to find subsequent employment or have a spouse who is still working. A change of enforcement patterns might relieve the city from covering some of these most expensive retirees.

Potential Cuts and Their Savings Estimates

To bring New York City into line with the standards prevailing elsewhere, the city should also pare back some of the benefits that it offers. Significant savings could be realized on three fronts. First, and most pressingly, the city should eliminate or significantly abridge the coverage of Medicare Part B. As mentioned earlier, New York City is the only municipality in the country to pay the full Part B premium. There is a consensus among experts that meaningful savings would accrue by cutting the city’s contribution to cover only half of Part B. A 2013 Citizens Budget Commission (CBC) report estimated $140 million a year in savings,[22] and a 2017 analysis by IBO estimated $148 million in the first year.[23] (Health-care inflation means that Part B premiums grow, explaining the higher savings found by the later report.) This reform alone would cut OPEB liability by 5% or 10%, depending on whether current retirees were included.[24]

A more ambitious reform would eliminate any funding for Part B premiums, as is the norm for other employers. The 2013 CBC report estimated $280 million in yearly savings (that number would be somewhat higher at current Part B prices).[25] Even if the premium support were eliminated only for future employees, OPEB liability would be cut by $9.3 billion. A reasonable reform might be eliminating Part B coverage for new hires and cutting the subsidy in half for the current population. (Halving the subsidy would leave most retirees paying only abut $70 a month—not a serious hardship.)[26]

The bare minimum reform is for the city to stop paying the Part B surcharge for those with high incomes. It makes no sense for the city to be paying this extra fee for the 4% of city retirees whose high incomes qualify them for this surcharge. IBO has estimated that this would save the city $13 million annually.[27]

The second front is scaling back the city’s contribution to other health-care premiums. The 2013 CBC report found that “a required contribution of 20 percent [by retirees] would save the City more than $300 million annually. A 50 percent contribution by retirees, which is higher than that of State retirees but not as high as other cities, would save $768 million” in the first year.[28] (Again, health-care inflation should make these numbers somewhat understated.) A 2017 report, also by CBC, examined the effects of requiring a 50% contribution by retirees. Requiring that contribution from the under-65 population would reduce OPEB liability by $16.1 billion (nearly 17% of the total liability), and requiring that contribution from the over-65 population would reduce OPEB liability by $7.6 billion (8%).[29]

The third front is cutting spousal coverage. Using 2013 numbers, CBC estimates that by eliminating spousal Medicare Part B coverage, the city would save $45 million a year.[30] By requiring a 50% contribution for all spousal health coverage, the city could reduce OPEB liability by $12.6 billion (13%).[31]

Retiree Medical Trust

A more ambitious approach would be to restructure the entire OPEB system. The most promising proposal along these lines is called a Retiree Medical Trust. In essence, the idea is to move from a model where the government guarantees a certain benefit to one in which the government contributes a set amount of money to a trust, and the municipal union decides which retiree health benefits to spend it on. RMTs have been put into practice in California, Washington, and Oregon.[32] Because the union determines what benefits to offer and the eligibility for the program, the details of implementation will vary, based on specific circumstances. For example, the Washington State Council of Fire Fighters established an RMT where “participating employers or employees make $75 monthly contributions on active employees. The Washington plan is projected to disburse $425 a month for life after retirement at age 53 for career employees (those with at least 25 years of service in the plan).[33] Higher medical costs in New York City may require that the city commit to a different contribution level, but the basic principle should work just as well.

New York City’s municipal unions already run welfare funds to cover retirees’ vision and dental care, so they have some demonstrated competence in this area. Daniel DiSalvo explains: “The key feature of RMTs is that the plans are run by employees or their unions, not by employers. In that sense, RMTs function like defined-contribution plans for retiree medical benefits. Employees benefit because they can keep valuable retirement benefits; employers benefit because the liabilities are no longer on their books.”[34] These liabilities are rather unpredictable for the city. As Thurston Powers notes, “medical inflation has historically been higher and less predictable than general inflation.”[35] Instead of letting ancient negotiations lock in certain benefits forever, governments can commit to a predictable and sustainable level of subsidy, and unions can decide on what benefits best suit their needs.

III. Pension Reform: Steps Toward a Defined-Contribution System

A defined-benefit pension system, like the one that New York City offers to its public workers, has two main drawbacks. First, it leaves the city holding all the risk; the employer promises to pay out a certain income each year, regardless of the performance of its investments in the market. In worst-case scenarios, economic downturns may create pension-fund losses that a state or municipality needs to backfill at the exact moment when their budgets are otherwise strained. For New York City, this problem is particularly acute. Because the city’s income-tax base is very sensitive to the performance of Wall Street, the city is exactly the wrong actor to hold stock-market risk.[36] This policy has left the city holding a rather large unfunded pension liability. As of June 30, 2019, the city’s pension obligations totaled $203.1 billion, and that obligation was 78.7% funded.[37] An official post-Covid-funded ratio has yet to be released, but the number is unlikely to be encouraging.

Second, defined-benefit systems also distort personnel decisions by incentivizing a sclerotic form of job lock. These pension plans are slow to vest (realizing most of your gains in the last few years of service) and are not portable (switching careers cancels your benefits). Public employees have less flexibility to leave for a new job or to retire before they are fully vested, and potential employees who might join the public workforce later in life are forced to forgo most pension benefits.

As such, a different public-employee retirement system is not a zero-sum trade-off between the interests of workers and those of the city. Creating a plan with faster vesting and more portability provides workers more flexibility and equips the city to better attract a talented workforce. That is why polling often shows support among parts of the city workforce for a defined-contribution system. A poll of New York State public school teachers found that 26% would opt in to a defined-contribution plan, were they offered one. Meanwhile, “57 percent support the creation of a ‘hybrid’ retirement plan combining a smaller defined-benefit pension with defined-contribution accounts.”[38]

Instead, the current system locks almost everyone in to a defined-benefit system. The pension’s benefits and the vesting will depend on employees’ profession and tier (the year they were hired). Thus, unlike for OPEB, there is no uniform set of benefits for all employees. While most employees receive a defined-benefit pension, the SUNY and CUNY systems have been unique in offering employees the option of a defined-contribution plan, and close to three-quarters of the faculty in both systems have opted in to the plan. When done correctly, this move can benefit both parties. The potential for conflict arises over the issue of risk. Understandably, retirees worry about outliving their savings as well as the potential for large negative market shocks that will reduce retirement income. As such, realistic reforms to the system should address retiree concerns about excessive risk. This section details two proposals that can ensure the financial futures of the city and its retirees.


The city, empowered by the required state legislation, should consider a voluntary defined-contribution system that offers long-term employees an annuity (a financial asset that will guarantee a yearly fixed income for the remainder of the holder’s life), for which there is no longevity or market risk. This option is currently offered to SUNY and CUNY employees, as mentioned above, and is popular among the faculty.[39] Under this system, workers make contributions to a retirement account. Should they change jobs, the account is portable; but should they retire, they are provided a menu of well-priced annuities. A common criticism of annuities is that people tend to pay too much money up-front in return for too little income. However, for SUNY and CUNY employees, the union has oversight to ensure that the annuities are fair, and the entire program is optional. Anyone unhappy with the annuity offerings has an easy exit option.

According to Allison Schrager, the annuity program is popular with SUNY and CUNY employees for two reasons. First, annuities are easier for employees to understand because they offer a definitive statement about the amount of income to which an employee will be entitled for a given plan. Unlike 401(k) programs, annuities are in the language of income, not assets, which makes this program an attractive option that can pull people away from the defined-benefit system.[40] Second, TIAA (Teachers Insurance and Annuity Association of America), the nonprofit that runs the system, is owned by its investors, so retirees avoid the high fees that often eat up the returns of other investment plans.[41] Thus, by offering an accessible choice of fairly priced annuities, this model ensures that neither the city nor the retiree holds much risk. Instead, most of the risk is held by a financial institution structured to handle it.

These voluntary plans tend to be much more popular among the CUNY and SUNY faculty, compared with the support staff. This discrepancy may reflect a greater preference for a defined-contribution system among higher-income and more educated employees. A higher income makes employees more tolerant of investment risk that they hold before they buy an annuity, whereas people with less income may prefer their benefits to be guaranteed. Potentially, more educated people may feel more comfortable managing retirement decisions. Therefore, this annuity option should be opened to the city’s public school teachers who are most demographically similar to the university faculty. However, just as much of the CUNY and SUNY support staff tend not to opt in, the rest of the city’s workforce is less likely to opt into such a plan. Thus, a reform of the standard pension system is also desirable.

Cash Balance Plans

As an additional measure, the city should consider transitioning the entire workforce to a cash balance (CB) plan. A CB plan aims to give workers maximum flexibility while ensuring that the employer does not hold all the risk. It is a defined-benefit plan where employers keep a fictive “account” for each employee. These accounts do not hold any assets; rather, they are a bookkeeping method—an IOU. The size of that IOU is called the cash balance.

Think of these accounts as a way of preserving portability within a defined-benefit plan. In a defined-benefit plan, all the resources are pooled into a single investment strategy, and if an employee changes jobs before being vested, the employee leaves the pool and loses out on pension benefits. In a defined-contribution plan, all the resources are broken into individual accounts where people are responsible for their own investment, but the accounts belong to the employees, giving them total portability. The CB plan combines a pooled investment strategy with the ability for employees to take their shares of the pool when changing jobs. An employee’s “account” in a CB plan doesn’t have any money in it (allowing for a pooled investment strategy). Instead, an account reflects the share of the common pool to which employees are owed when they retire or switch jobs. When retiring, the account’s cash balance determines how generous an annuity the pensioner will have. Alternatively, upon switching jobs, the city pays the account’s cash balance into a fully portable, standard retirement account.

The value of the account grows when the employer assigns to the account two things: pay credits and interest credits. Pay credits are some percentage of the employee’s wage, so with each year of work, the employee’s CB account will grow. Interest credits are apportioned based on the returns of the pooled investments. When the investments do well, the employee gets a bigger interest credit. However, when the employer’s investments do poorly, employees are still guaranteed a minimum interest credit. In this respect, CB plans are fundamentally defined-benefit plans, since employees are guaranteed a minimum return, no matter what. However, in contrast to a traditional defined-benefit plan, the employer does not bear all the risk. If the market does poorly, employers are on the hook only for the minimum interest credit, whereas a traditional defined-benefit plan requires the exact same income from employers, regardless of how their investments perform. Finally, when an employee retires on a CB plan, the money in the account is converted into an annuity to give the retiree a steady stream of income. Thus, there is neither market risk nor longevity risk for the retiree, as those downsides are held by the annuity issuer.

While the system cannot promise simplicity, it does a fair job of combining attractive features of defined-benefit (stability for employees) with elements of defined-contribution (portability for employees and lower risk that employers experience heavy losses during recessions). As Steven Malanga notes, this mutually beneficial trade-off is why states with powerful public-sector unions investigate or implement CB plans when they run into pension trouble: it is a potential change that unions might be open to when the fiscal outlook becomes dire enough.[42]

Beyond the fiscal benefits, a CB can help retain a talented workforce. Josh McGee and Marcus Winters explain how the current defined-benefit system encourages the most experienced teachers to leave. The current pension plan vests only after many years on the job. Once employees are at the retirement age and fully vested, they are left with no incentive to stay on the job because every year they stay on is a year that they forgo that very generous benefit. McGee and Winters find that “because there would no longer be stiff penalties for working beyond the official retirement age . . . more late-career teachers would be expected to postpone retirement, boosting the level of teaching experience in their school system.”[43] A CB plan would vest more evenly, spreading the accumulation of retirement benefits, to avoid incentivizing the retirements of those most experienced workers.

Reform Without Revolution

Importantly, the moves away from a defined-benefit system would not realize savings in the immediate, or even medium, term. As new employees abstained from the defined-benefit system, there would be fewer contributors to fund the incomes of current retirees. While reform in the direction of a defined-contribution system is needed to ensure the city’s long-term financial health, some less ambitious reforms could help the city through its current crisis.

Within the current system, there are three commonsense reforms to pursue; these proposals could realize short-term savings because the programs they amend are not technically part of the pension proper, making them unprotected by the state constitution and amendable for current employees. First, in the current system, nondisabled police, firefighters, and correction officers receive a $12,000 bonus to their pension every year. This program is misleadingly titled the “Variable Supplement Fund” because, at its inception in the 1960s, it was meant to return uniformed employees extra money only when their pension fund’s investments exceeded expectations. The initial conception was unsound, since the proceeds of good years need to be saved to cover bad years. However, the idea became even more unsound in 1993, when the bonus became guaranteed regardless of market performance. These bonuses now add substantially to the state’s pension liability; in 2014, payments totaled $500 million.[44] These payments are not constitutionally protected and could be scaled back and eventually eliminated. Second, the city spends $155 million a year contributing to union annuity funds that supplement retiree pensions.[45] These contributions could be ended or scaled back for current employees, with the assent of the unions. Third, the city guarantees a 7% return to teachers’ voluntary retirement contributions. In a low interest-rate environment, meeting a 7% return requires more and more backfilling from public coffers. This provision costs New York City $1.2 billion annually.[46] All three of these supplemental benefits are added to the already-generous pension system and therefore not protected as unamendable contracts. At a time when the city is desperate to find savings, ending or amending these arrangements would ensure that the entire burden is not borne by taxpayers and current employees.

IV. Early Retirement Initiative

To balance the city’s most recent budget, the mayor committed to finding a billion dollars in labor savings. That is a very tall order. An early retirement initiative (ERI) is a common tactic for budget-strapped governments and is likely to be part of the city’s plan to meet its goal. These initiatives work by offering employees faster vesting (full pension benefits early) on the condition that they agree to retire now. In effect, this program saves money by moving people off payroll but has to compensate them through a more generous retirement package than they would normally receive. In a recent report, Eric Kober highlighted an ERI as an important source of savings during this crisis, but cautioned that to realize meaningful savings, the program must be “targeted to job titles in which retiring employees need not be replaced, at least on a one-for-one basis.”[47] However, the history of ERIs in the city show that targeting can be easier said than done.

An examination of New York City’s 2010 ERI by CBC found: “The combined $681 million savings is the net of gross savings from two-year payroll reductions of $1.4 billion minus pension benefit costs of $755 million. The savings are diminished to the extent early retirees are replaced by new hires.” With the assumption of a $35,000 starting salary for rehire, 83% of positions would need to be refilled to cancel these savings.[48] However, CBC was unable to estimate what percentage of positions were replenished, making any conclusive analysis elusive. In fact, the Empire Center reviewed New York State’s history of ERI programs and was dubious that any large savings were realized, given the strong push to rehire.[49]

So why do administrations often pursue these initiatives when their record is so mixed? By moving expenses from payroll to the pension system, ERIs can act as a shadow form of long-term borrowing. They move expenses off budget and onto the pension system, where the costs amortize out over many years. (In effect, the pension fund loses money immediately, but unlike the budget, which must be balanced each year, the pension fund is allowed to take many years to regain actuarial soundness.) Given the acute nature of the city’s current finances, politicians understandably want to pursue such an approach. However, to ensure that this ERI is not merely an accounting gimmick, the retirement incentives must be targeted to positions that are the least likely to be refilled. That is no easy task; unions object when the ERI is restrictive. They want the enhanced benefits to be open to as many employees as possible, viewing the initiative as an opportunity to get a more generous retirement for their members rather than a way to save money.

That is why there should be two conditions on a proposed ERI to actually realize savings. First, the Covid crisis has forced the government to find new efficiencies by moving formerly face-to-face jobs online and has made certain city functions obsolete under the circumstance of social distancing. An offer of early retirement should be considered, for example, for those employed to proctor civil service exams or process papers. Second, it needs to be clear that a successful ERI is the alternative to layoffs; the aim is to focus both the employer and the unions on offering enhanced benefits only to those who are unlikely to be replaced. (DeBlasio’s promise to find a billion dollars in labor savings makes clear that layoffs are, in fact, the alternative to finding meaningful savings.) The unique circumstances of credible layoffs and actual redundancies mean that, if properly structured, this ERI might successfully realize savings.

V. Consolidating Fund Management

New York City runs five parallel pension funds: the New York City Board of Education Retirement System (BERS), New York City Fire Department Pension Fund (FDPF), New York City Police Pension Fund (NYCPPF), the New York City Teachers’ Retirement System (TRS), and the New York City Employees’ Retirement System (NYCERS) for everyone else. Maintaining so many parallel systems is woefully inefficient. In 2011, the Bloomberg administration moved to consolidate these funds into a single system. Unfortunately, this proposal was vetoed by unions. They feared having less influence in the new system[50] because a consolidated pension board would dilute their power relative to a system where each union can dominate the pension board specific to their members.

However, a less radical consolidation could still find savings, while reassuring each union that it still had significant influence over the pension board specific to its members. The Manhattan Institute agrees with IBO’s proposal to consolidate these five funds into a new system with only three funds, the same number as the state maintains. First, NYCPPF (police) and FDPF (fire) would be combined. The smallest fund, BERS, would be absorbed by TRS and NYCERS. The teaching professionals who are part of BERS (substitute teachers, therapists, etc.) would go to TRS, and the school’s support staff would go to NYCERS.

There are two reasons for this proposed change. First, the current system wastes a surprising amount on overhead. Things like real estate, redundant staff, and extra audits are all increased by running five parallel systems. IBO estimated that by consolidating into three funds, “the city could save $20 million in the first years with the savings growing to $41 million by the second year.”[51] Second, the consolidation might ameliorate the problems of debt overhang. When pension funds become severely underfunded, they have an incentive to take on more risky investment strategies, which are expected to yield higher returns in an effort to make up lost ground.[52] The Fire Department’s pension is severely underfunded, primarily attributable to the extra costs of firefighters who served during 9/11 reaching retirement age and claiming disability.[53] NYCPPF, however, is much larger than FDPF,[54] so combining the two would spread the losses over a new, larger fund that would be less affected by these unexpected disability claims. While the resulting fund would still have funding issues, it would not be in the desperate condition that the fire pension fund is in. Hopefully, it would be more able to dig itself out of its hole without resorting to an especially risky investment strategy.

VI. Conclusion

New York City faces deep fiscal distress that is likely to persist for some time. To restore long-term fiscal sustainability and put the city on sounder footing for the next recession, it should act now to reform the post-employment and pension benefits that it offers to its employees. This report has investigated a very broad range of options: some of these reforms are consensus ideas, and others may become consensus, should the city’s problems persist. Reforming OPEB, smartly targeting an ERI, and consolidating fund management could all yield near-term savings, in addition to long-term dividends. Changes to new employee pensions would realize gains more slowly but would make the city more resilient for the next crisis.

Appendix: Summary of Potential Savings

Figure 1: OPEB Proposals

Policy Proposal


Consolidate administration of union welfare funds

$14 million a year (IBO, 2018)

Require 15 years of employment to qualify for OPEB (currently, 10 years are required)

Yearly savings of $12 million in 2029, growing to $37 million by 2031 (IBO, 2018)

Halve Medicare Part B subsidies

$148 million a year (IBO, 2018). Halving Part B subsidies for future retirees would reduce OPEB liability by 5%; including current retirees would reduce it by 10% (CBC, 2017)

Eliminate Medicare Part B subsidies

$280 million a year (CBC, 2013); a 10% decrease in the OPEB liability, if Part B subsidies are ended for new retirees (CBC, 2017)

Eliminate Medicare Part B surcharge

$13 million a year (IBO, 2018)

Require a 50% contribution for health-care premiums

$768 million a year (CBC, 2013). Requiring a 50% contribution from under-65 retirees would reduce the liability by 17%; requiring a contribution from retirees 65 and over would lead to an 8% reduction (CBC, 2017)

Eliminate spousal Medicare Part B subsidies

$45 million a year (CBC, 2013)

Require a 50% contribution for spousal health-care premiums

A 13% decrease in the OPEB liability (CBC, 2017)


Figure 2: Pension Proposals

Policy Proposal


End 7% return guarantee for teachers’ voluntary retirement contributions

$1.2 billion a year (CBC, 2016)

Eliminate variable supplement fund ($12,000 bonus every year for retired uniformed employees)

$500 million a year (CBC, 2014)

Eliminate union annuity funds

$155 million a year (IBO, 2018)


Figure 3: Proposals to Consolidate Funds

Policy Proposal

Annualized Savings

Consolidate pension boards

$20 million in the first year, with savings of $41 million every year thereafter (IBO, 2018)

Consolidate administration of union welfare funds (this proposal also appears in OPEB section)

$14 million a year (IBO, 2018)


The author would like to thank Allison Schrager, Daniel DiSalvo, E.J. McMahon, and Eric Kober for their input, as well as Nicole Gelinas and Steven Malanga for editing and reviewing an early draft of this report.


  1. E. J. McMahon and Josh B. McGee, “The Never-Ending Hangover: How New York City’s Pension Costs Threaten Its Future,” Manhattan Institute Report, June 20, 2017.
  2. Ibid.
  3. New York City Independent Budget Office (IBO), “Fiscal History: Pension Contributions.”
  4. McMahon and McGee, “The Never-Ending Hangover.”
  5. Robert Callahan, “Another Covid-19 Cost? As the Stock Market Tumbles the City’s Pension Costs May Climb,” NYC IBO Fiscal Brief, March 2020.
  6. New York State Financial Control Board (FCB), “Fiscal Stress Created by COVID-19,” June 1, 2020.
  7. Thad Calabrese, “The Price of Promises Made: What New York City Should Do About Its $95 Billion OPEB Debt,” Citizens Budget Commission (CBC) report, Oct. 25, 2017.
  8. Michael Hendrix, “Taking the City’s Temperature: What New Yorkers Say About Crime, the Cost of Living, Schools, and Reform,” Manhattan Institute, Sept. 1, 2020.
  9. Stephen Eide, “Constitutional Public Pension Guarantees: Unfair, Unaffordable, and Bad Policy,” Manhattan Institute, Aug. 20, 2013.
  10. New York City Employees’ Retirement System (NYCERS), New York City Board of Education Retirement System (BERS), New York City Fire Department Pension Fund (FDPF), New York City Police Pension Fund (NYCPPF), and the New York City Teachers’ Retirement System (TRS).
  11. Jonathan Rosenberg et al., “Savings Options: Lowering Wage and Benefit Costs of City Employees,” NYC IBO, Dec. 28, 2018.
  12. Calabrese, “The Price of Promises Made.”
  13. FCB, “Fiscal Stress Created by COVID-19.”
  14. Ibid.
  15. Calabrese, “The Price of Promises Made.”
  16. Rosenberg et al., “Savings Options.”
  17. Calabrese, “The Price of Promises Made.”
  18. Maria Doulis, “Everybody’s Doing It: Health Insurance Premium-Sharing by Employees and Retirees in the Public and Private Sectors,” CBC report, January 2013.
  19. Calabrese, “The Price of Promises Made.”
  20. Rosenberg et al., “Savings Options.”
  21. Andrea Inman, “Preventing Inappropriate and Excessive Costs in the New York State Health Insurance Program,” Office of the New York State Comptroller, May 9, 2018.
  22. Doulis, “Everybody’s Doing It.”
  23. Rosenberg et al., “Savings Options.”
  24. Calabrese, “The Price of Promises Made.”
  25. Doulis, “Everybody’s Doing It.”
  26. Calabrese, “The Price of Promises Made.”
  27. Rosenberg et al., “Savings Options.”
  28. Doulis,“Everybody’s Doing It.”
  29. Calabrese, “The Price of Promises Made.”
  30. Doulis, “Everybody’s Doing It.”
  31. Calabrese, “The Price of Promises Made.”
  32. E. J. McMahon, “Shrinking the Retiree Health Care Iceberg,” Empire Center for Public Policy, Oct. 25, 2012.
  33. B. Shana Saichek et al., “Creating a Retiree Medical Trust: How Employers & Employees Can Use Pre-Tax Dollars to Fund Their Retiree Medical Costs,” National Conference on Public Employee Retirement Systems, 2006.
  34. Daniel DiSalvo, “North Carolina’s OPEB Experiment: Defusing the State Debt Bomb,” Manhattan Institute, February 2020.
  35. Thurston Powers, “Post-Employment Benefits in New York, New Jersey, and Connecticut: The Case for Reform,” Manhattan Institute, Oct. 3, 2019.
  36. Jesse McKinley, William Neuman, and Ben Casselman, “Wall Street’s Slide Hurts New York; City Loses Nearly $1 Billion in Tax Revenue,” New York Times, Feb. 7, 2019.
  37. Scott M. Stringer, “Comprehensive Annual Financial Report of the Comptroller for the Fiscal Year Ended June 30, 2019,” New York City Comptroller, Oct. 31, 2019.
  38. Poll: NY Teachers Want Retirement Choice,” press release, Empire Center for Public Policy, Mar. 14, 2012.
  39. E. J. McMahon, “Optimal Option: SUNY’s Personal Retirement Plan as a Model for Pension Reform,” Empire Center for Public Policy, Feb. 16, 2012.
  40. Robert C. Merton, “The Crisis in Retirement Planning,” Harvard Business Review 92, nos. 7–8 (July–August 2014): 43–50.
  41. Allison Schrager, “The World’s Most Reviled Financial Product May Save Your Retirement,” Quartz, June 3, 2016.
  42. Steven Malanga, “The State Pension Crisis Goes Beyond the Big Blue States,” Wall Street Journal, May 30, 2020.
  43. Josh McGee and Marcus Winters, “Better Pay, Fairer Pensions III: The Impact of Cash-Balance Pensions on Teacher Retention and Quality: Results of a Simulation,” Manhattan Institute, Oct. 3, 2019.
  44. Maria Doulis, “Christmas Bonuses for Uniformed Retirees Weaken the City’s Pension Funds,” CBC, Dec. 11, 2014.
  45. Rosenberg et al., “Savings Options.”
  46. John Breit, Charles Brecher, and Maria Doulis, “An Expensive and Risky Benefit: How Low Interest Rates Cost New York City Taxpayers $1.2 Billion Annually,” CBC report, Oct. 5, 2016.
  47. Eric Kober, “De Blasio’s Budget: Putting Off the Tough Decisions,” Manhattan Institute, Apr. 30, 2020.
  48. Tammy Gamerman, “How Much Did New York’s 2010 Early Retirement Incentive Save? ” CBC, Oct. 25, 2011.
  49. Tim Hoefer, “Early Retirement for State Workers: Money-Saver, or Costly Sweetener? ” Empire Center for Public Policy, May 11, 2010.
  50. Shawn T. Wooden et al., “Consolidation of Public Pension Plan Investment Management: Is This a Solution to the Problem? ” Bloomberg Law, Aug. 2, 2017.
  51. Rosenberg et al., “Savings Options.”
  52. Lina Lu et al., “Reach for Yield by U.S. Public Pension Funds,” Federal Reserve Bank of Boston, Supervisory Research and Analysis Unit, working paper no. SRA 19-02, July 8, 2019.
  53. Empire Center for Public Policy, “Majority of New FDNY Retirees Receive Six-Figure Pensions,” press release, July 26, 2018.
  54. Pension/Investment Management: Asset Allocation,” Office of New York City Comptroller, May 2020.

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