E.J. McMahon: A meaningful new try on pensions
By E.J. McMahon | Posted: Friday, January 20, 2012 3:15 am
Just over two years ago, New York State enacted what then-Gov. David A. Paterson presented to the world as "landmark pension reform."
In his 2012-13 budget proposal this week, Gov. Andrew M. Cuomo raised the subject of pension reform all over again. Why? Because Paterson's bill was a "landmark" only in the annals of Albany political hyperbole.
Paterson's December 2009 pension measure reversed benefit sweeteners enacted by the State Legislature over the previous 25 years, while trimming police and fire pensions a bit more. But it ignored the core problem in the public pension system: open-ended financial risk for taxpayers.
Public-sector pensions are financed out of big pools of stock and bond investments -- like the trust fund that feeds the New York State and Local Retirement System. When asset values soared in the bull market of the 1990s, costs seemed to magically vanish and benefits were made more generous. But since 2000, it's been a far different story.
From the end of fiscal 2000 through fiscal 2011, a period in which the state pension fund assumed it would earn annual returns averaging close to 8 percent, actual returns gyrated from a 29 percent gain in 2004 to a 26 percent loss in 2009, and averaged less than 5 percent. Meanwhile, annual benefit payments doubled, from $4.2 billion to $8.4 billion, as the number of retirees and benefit levels both rose.
The same trend was experienced by New York City's five municipal pension funds and by the New York State Teachers' Retirement System. All are deep in the hole, and taxpayers are being charged billions more a year to return these pension systems to what government accounting standards call "fully funded" -- which would still be insufficient by private pension standards.
Public employee pensions in New York are generous by both private and public standards, on average replacing 77 percent of pre-retirement income without even counting Social Security. But the purpose of reform shouldn't be simply to offer less-expensive benefits in the future. The public needs a system that is financially more transparent and sustainable. Ideally, New York would break entirely with the defined-benefit approach and move all government workers to a 401(k)-style defined-contribution system -- now the prevalent retirement model in the private sector. At the very least, real pension reform would require employees to share in the risk.
Since the state constitution effectively locks in promised benefits for active workers, only future employees would be affected by any change. That's why New York pension plans are arrayed in "tiers" based on employee hiring dates. The 2009 changes were Tier 5.
Cuomo's first stab at a Tier 6, introduced last June, was a same-but-less approach -- more of a Tier 5-A -- reducing benefits, raising the retirement age and requiring higher employee contributions. Unlike Paterson's plan, it applied to New York City as well. But, like Paterson's proposal, it left the problematic pension financing structure intact.
The Tier 6 proposal included in Cuomo's latest budget is a big improvement. It would give state and local employees the option of joining a defined-contribution plan modeled on the popular Teachers Insurance and Annuity Association accounts offered by the State University of New York since the mid-1960s. For those choosing a traditional pension, it would add a "risk-reward" provision. When the pension fund needs more money, employees as well as taxpayers would have to contribute more.
The proposal is certainly far from perfect. Better models exist elsewhere -- including California, where Gov. Jerry Brown has proposed a mandatory "hybrid" of defined-benefit and defined-contribution accounts, which in turn is similar to a new Rhode Island law. But Cuomo deserves credit for finally putting real reform on the table. Legislators should see this as an opening to do more -- not to pass yet another underwhelming "landmark."
E.J. McMahon is senior fellow at the Manhattan Institute's Empire Center for New York State Policy.