Gov starts to cut retiree costs
With yesterdays release of his budget, Gov. Cuomo provided some details about his pension-reform ideas — and while the proposal is not yet bold enough, its cause for green shoots of optimism.
Traditional public-employee pensions have two main problems: They expose taxpayers to excessive costs and excessive risks:
* On the cost side, New York is a leader: Our pensions are the second-most generous in the country, and easily the most generous among states where public employees get Social Security benefits.
* On the risk side, were now seeing how a stock-market crash can unexpectedly send pension costs soaring, crowding out municipal services and driving up taxes.
The core of Cuomos proposal — a less generous schedule of pension benefits for newly-hired employees — looks a lot like previous reforms, and has the same limits: It produces savings only far in the future, and only if the Legislature doesnt interfere in the coming decades.
But Cuomo also has two new ideas that would reduce the uncertainty of pension costs, by shielding taxpayers from part of the investment risk inherent in defined-benefit pensions.
One is that new employees required pension contributions will adjust up and down with the pension funds performance. The other is that employees will be able to opt out of the pension system and into a 401(k) plan.
As Cuomo has noted, a 401(k)-style plan managed by TIAA-CREF now serves many CUNY and SUNY employees well, and should be made available to other public workers. (Indeed, this is a point that my colleagues at the Empire Center for New York State Policy have been making for years.)
Both proposals reflect a recognition that taxpayers are bearing too much risk by guaranteeing these benefits. Today, when pension funds underperform, New York and its municipal governments — and therefore, their taxpayers — must make sharply higher payments into the funds to make them whole.
Astonishingly, the city of New York has gone from spending less than $1 billion on pension contributions 12 years ago to more than $8 billion today — an increase of nearly $1,000 for every resident. More money that must be dumped into the pension funds means less that can be spent on public services or returned to taxpayers pockets.
Cuomos proposed adjustment mechanism for employee contributions to pensions will blunt those effects, because public workers will share investment risk with taxpayers. And while defined benefits are a great deal for many public employees (theyre so expensive, how could they not be?) some workers — especially those who dont intend to work a full career in government — will opt for the 401(k) option, further reducing taxpayers risk exposure.
But while Cuomos reform is a step in the right direction, he could go so much further, by drawing on examples from other states — such as Rhode Island, a bastion of union strength where 80 percent of legislative seats are held by Democrats, which just enacted a bold pension reform.
Rhode Islands new system greatly shrinks the defined-benefit pension offered to workers and pairs it with a mandatory 401(k)-style plan. The new defined benefit will allocate investment risk among taxpayers, workers and retirees by adjusting the benefit formula (not the employee-contribution rate) as the pension fund over- or underperforms.
Each of these changes goes farther than Cuomos proposals in reducing the volatility of costs borne by school districts and other governments. If Rhode Island can do it, why not New York?
Then theres the Cash Balance Plan retirement model used by Nebraska and many corporations. These plans partly resemble defined-benefit pensions: Employees money is managed centrally, and returns on retirement savings are partly or entirely guaranteed. But the plans avoid many of the pension problems that bedevil New York taxpayers, because they involve accruing benefits smoothly over a career, eliminating pension-padding gimmicks like “spiking” and “double-dipping.”
It is also easy to structure these plans to share risk between employees and employers — avoiding the choice between pensions, where the taxpayer bears all the risk, and 401(k)s, where the employee does.
By embracing variable employee contributions and an optional 401(k), Cuomo has acknowledged that New Yorks pensions have exposed governments to unpredictable costs and taxpayers to unacceptable risks. As we debate pension reform, he should look to other states for bolder options to reduce those costs and risks, so local governments can focus on providing core services.
Original Source: http://www.nypost.com/p/news/opinion/opedcolumnists/breath_of_hope_I515mYDNfHRGFzYvSwHRKN