December 04, 2008
Mayors seek to tweak pensions
The Conference of Mayors is calling for an overhaul in the state pension system, including creating a new pension "tier" for employees hired in the future. Unfortunately, while it would marginally curb rising expenses in the future, NYCOM's agenda is not particularly ambitious and does not represent fundamental change.
The new pension structure recommended by the Mayors would:
1) require an employee contribution; 2) increase the minimum retirement age at which an individual can begin to draw down even a partial pension benefit; and 3) revise the way the final average salary (FAS) is determined by considering more than three years and taking into account only base pay. These are steps in the right direction -- but very small ones, possibly inspired by similar changes recently enacted in New Jersey, where public employee unions enjoy a similar degree of political domination.
NYCOM certainly makes a stronger case for doing more. Pension costs for villages and cities outside New York City increased tenfold between 2003 and 2005, the Conference says, and city pension expenses rose another 17 percent between 2006 and 2007. Moreover, while NYCOM doesn't mention it, the recent 20 percent drop in the value of the state retirement system investments points to a surge in employer (i.e., taxpayer-funded) pension contributions starting in 2010.
In a bid to minimize future increases, NYCOM also wants state officials to "reevaluate the overall funding methodology -- specifically the factors that determine contribution rates -- to ensure that local governments are not paying any more than is absolutely necessary to properly fund the system."
But manipulating assumptions or stretching payment schedules to take some of the sting out of pension cost increases" as was done after investment values dropped earlier in this decade -- is the last thing the state ought to be doing in this financial environment.
In fact, recent research suggests that current accounting rules have resulted in a significant under-funding of public pension systems throughout the country -- even those, like New York's, that technically consider themselves "fully funded." As a result, the next generation of taxpayers may be saddled with massive unfunded liabilities that are now almost completely acknowledged by government officials.
The basic problem here is the traditional defined-benefit pension system itself, which offers public employees a constitutionally guaranteed (and thus risk-free) array of benefits that are far more generous than anything available to workers in the private sector.
The best way to curb expenses, balance financial risk, and eliminate the extensive gaming and manipulation inspired by the current system is to shift new hires to a savings-based defined contribution (DC) plan, or to a DB-DC hybrid featuring a limited traditional pension and a centrally managed savings account (like the federal Thrift Savings Plan).
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