December 17, 2008
Tier V: Back to the Future
Governor David Paterson has proposed creating a Tier V pension system for newly hired employees, a tepid reform that basically mimics the state's early 1990's pension system--with one twist.
That twist is that overtime earnings would be excluded when calculating employee pensions. Oddly, the new tier would not include police and firefighters, whose overtime costs are a major driver in local government budgets.
The Division of the Budget estimates Tier V would save the state $10 million in 2009-10 and $30 million the following year.
Excluding police and fire pension costs, DOB says :
Employer pension contribution rates under Tier V are expected to be 29 percent lower for new teachers and 23 percent lower for most other new employees hired outside New York City. The Executive Budget also includes a proposal to implement a new tier of pension benefits for newly hired City of New York uniformed employees. This local option is being advanced at the request of the Mayor of the City of New York and will not be acted upon without the consent of the City Council.Below is a chart from the governor's budget presentation which shows how the proposed Tier V is a roll back to the Tier IV system prior to 1990's pension sweeteners.
In a recent NYPublicPayrollWatch post, Empire Center Director E.J. McMahon cites research suggesting current accounting rules have resulted in a significant underfunding of many public pension systems, including New York's. McMahon writes:
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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