Assembly Speaker Sheldon Silver is insisting that Gov. Cuomo "negotiate" his plans to reform New York’s outdated pension systems with the public-employee unions — which misses the biggest point of reform.
State law puts pension rules outside collective bargaining, and for good reason. The unions can be expected to focus on the interests of one kind of worker — long-timers, who spend their entire careers working for government in New York. So they’re hostile to a key part of Cuomo’s reform: a defined-contribution option that is likely to appeal to young workers who may want to change careers down the line.
Pension payments have skyrocketed in the last four years, but cost isn’t the only reason for reform. As important: New York’s pensions don’t make the most use of taxpayer dollars to recruit and retain the best workers.
We know this from experience in the CUNY and SUNY systems. Workers at public universities in New York can choose between a traditional pension and a generously funded defined-contribution plan. As documented in a recent report from the Manhattan Institute’s Empire Center, a majority of SUNY and CUNY workers go the defined-contribution route, in part because people in higher education know their careers may take them to different universities someday.
Contrary to Comptroller Thomas DiNapoli’s warnings about the defined-contribution approach, these plans were explicitly designed to serve as a substitute for traditional pensions, and they’ve been serving employees well.
But the logic of job mobility applies elsewhere. About half of all teachers leave the profession within five years of entering. How does a traditional pension with a vesting period of 10 years (rising to 12 under Cuomo’s Tier VI proposal) help attract recent college graduates who don’t even know if they’ll spend a full career teaching, let alone teaching in New York?
Look at other states. For example, a study by Maria Fitzpatrick of the Stanford Institute for Economic Policy Research looked at a pension sweetener awarded to participants in the Illinois Teachers’ Retirement System in the late 1990s: Teachers could get a larger pension in the future by agreeing to extra payroll deductions for a couple of years upfront.
The generosity of the sweetener terms varied but were almost uniformly favorable — 99 percent of teachers could expect a 7 percent or better compounded annual return on their extra payments. Yet many declined the option. On average, teachers were willing to pay only 17 cents on the dollar for the opportunity to get a larger pension — meaning that for every dollar Illinois taxpayers spent funding the pension system, teachers were getting benefits that they valued at only 17 cents.
This is why large corporations have been abandoning defined-benefit pensions in droves. Given a certain amount of compensation, employees prefer to be paid in cash, and as retirement benefits go, defined-contribution plans look a lot like cash: The funds are in an account controlled by the employee, and they are his to keep even if he leaves a job after just a few years.
On the other hand, defined benefits impose an unpredictable and growing cost burden on participating governments — crowding out those jurisdictions’ ability to pay cash wages to employees.
Absent the defined-contribution option, Cuomo’s reform is just yet another less costly tier tacked on to the five already in New York’s pension systems. And his longer vesting period would actually make the system even less efficient as a recruitment measure — while ensuring that the system even more narrowly serves the interests of the long-timers who dominate the public-employee unions.
Cuomo’s original defined-contribution proposal wasn’t perfect — in particular, its basic benefit level was too low. The governor would do better by making the optional employer and employee contributions mandatory, effectively making his proposal look a lot like the SUNY and CUNY plans.
But Silver may push him into abandoning the defined-contribution option altogether. That would be a mistake. The reform New York desperately needs is to move more employees off defined benefits and into a defined-contribution plan. If the governor backs down in the face of union opposition, he’s not really delivering reform.
This piece originally appeared in New York Post