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New York Takes a Bite Out of Pensions?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Quelle surprise! Bloomberg reports that N.Y. Raises Pension Requirements to Save $48 Billion:
New
York state’s pension program will raise the retirement age and
financial contributions for new workers to save the state and local
governments about $48 billion over 30 years.
The
change, affecting workers hired Jan. 1 or after, was approved by
legislators today and is supported by Governor David Paterson. The two
biggest public employee unions backed the change after Paterson agreed
to drop proposals to eliminate a 3 percent pay increase this year and
cut 8,700 state jobs.
“Savings will be achieved not
only in state spending, but at the local level, which will help to
reduce property taxes,” Paterson, 55, said in a statement. The state constitution bars reductions in pension benefits for existing workers.
New
York’s pension fund, the third-largest in the U.S., covers 1 million
current and retired workers, and had $126 billion in assets on Sept.
30, according to Comptroller Thomas DiNapoli, the sole trustee.
For
new workers, the bill raises the age for retirement without penalty to
62 from 55, imposes a 38 percent penalty on non-uniformed workers who
retire before 62 and increases the minimum years of service to draw a
pension to 10 from 5, according to Paterson’s office.
Overtime payments included in calculating pension benefits will be capped at $15,000 a year for civilian workers, and 15 percent of wages for police and firefighters.
Savings Estimates
The Division of Budget estimated in December 2009
that a similar package of pension changes would save $30 million in its
first year. In June, Paterson, a Democrat, said savings would be at
least $48 billion over 30 years. Assembly Speaker Sheldon Silver, a
Democrat from Manhattan, said today the changes would save state and
local governments $48.5 billion.
For teachers outside New York City, whose pension fund
covers 420,000 current and retired workers, the bill raises the minimum
retirement age to 57 from 55 without penalty, and increases their
pension contribution to 3.5 percent from 3 percent.
The
bill changes New York City teacher pensions to save the city $19.1
million this year, rising to $64.1 million in 2019, according to a news
release from the governor’s office.
The
agreement with the United Federation of Teachers will save New York
City $100 million over the next 20 years, Mayor Michael Bloomberg said
in a statement.
“I look forward to working with our
other partners in organized labor to begin creating the pension savings
the city needs, while still providing deserved benefits to city
workers,” Bloomberg said. The mayor is founder and majority owner of
Bloomberg News parent Bloomberg LP.
Existing Teachers
Pension
and health benefits for existing city teachers are unchanged, the mayor
said. New hires will pay 4.85 percent of their pay to the pension plan
for 27 years and 1.85 percent thereafter, up from current contributions
of 4.85 percent for 10 years and 1.85 percent through 27 years, he
said.
New teachers must have 10 years of service to
collect a pension, up from five years now, and must work 15 years to
collect health benefits after retirement, up from 10 years. The
alterations require changes in city law.
The new
category of pension benefits will do little to solve the state’s
problem of growing retirement costs, said E.J. McMahon, director of the
Empire Center for New York State Policy,
an Albany-based group that advocates less government spending. Benefits
promised current workers allow retirement at 50 percent of salary after
25 years.
“The legacy costs of our pension promises to current employees will remain a massive headache for decades,” McMahon said.
I urge you to read E.J McMahon's 2006 report, Defusing New York's Public Pension Bomb as well as his more recent comment, The Budget New York Needs, where he discussed New York's pension bomb:
New
York’s public-pension system has become the epicenter of an
influence-peddling scandal that has attracted the attention of the
Securities and Exchange Commission and the state’s attorney general.
But the millions in shady “placement fees” pocketed by a few
politically connected middlemen are small change compared with the
mushrooming cost of lavish pension benefits for state and local
government retirees. Keeping these retirees in clover will demand
billions more from New York’s sorely stressed taxpayers over the next
few years. And the real scandal is that politicians are so reluctant to
do anything about it.
In New York, as in almost every state,
public employees are entitled to defined-benefit (DB) pensions—a
guaranteed post-retirement income, based on peak salaries and career
longevity. By private-sector standards, benefit levels are
extraordinary. New York state and local government employees, as well
as employees of public authorities, can retire earlier, with larger
pensions, than the vast majority of the people who pay their salaries.
A
New York teacher with 30 years on the job, for example, can stop
working at 55 and start collecting an annual pension of roughly
$55,000—entering retirement with the equivalent of a $1.2 million
golden parachute, according to calculations by City Journal contributing editor Nicole Gelinas.
Taxpayers
must shoulder the risks of covering these already-promised benefits.
The pensions are paid out of gigantic pooled retirement funds, to which
government employers contribute varying amounts, depending on actuarial
assumptions and market fluctuations. During the Wall Street boom of the
1990s, pension-fund assets grew enough to reduce employer contributions
to all-time lows as a percentage of salaries.
The
downturn of 2001–03 had the opposite effect, rapidly driving pension
contributions up. Since 2000, the combined annual pension costs for all
governments in New York, including New York City, have risen from
slightly under $1 billion to nearly $10 billion—reflecting both market
conditions and benefit increases effective at the beginning of that
period.
New York City’s annual pension contributions alone, up
more than $3 billion over the last five years, are projected to rise by
another $1 billion over the next three. Annual pension bills for the
state and its local subdivisions, which now total about $3 billion,
could double or triple by 2015. Rising pension costs also pose a
considerable financial threat to the already-troubled Metropolitan
Transportation Authority.
And these official numbers actually
understate the problem because New York’s pension funds, like their
counterparts throughout the country, calculate employer contributions
based on government accounting standards that lowball their long-term
liabilities. According to these skewed standards, the pension funds for
New York State and New York City are technically at or near “fully
funded” status. But Gotham’s actuary calculated in 2006 that New York
City’s plans alone would be $45 billion in the hole if they employed
the more sensible liability calculations that private-sector DB plans
use.
Under the state’s constitution, pension benefits can’t be
“diminished or impaired” for any current member of a public-retirement
system in New York. So it will be difficult to stem the tide of
mounting pension costs in the short term. The debate over pension
reform is really about the appropriate mix of compensation for the next generation of government workers—and the impact they will have on state and local finances in the long term.
Far-fetched
as it may seem, given the New York State Legislature’s shameless
pandering to unions in recent years, there is precedent for pension
reform. During the fiscal crisis of the 1970s, the legislature managed
temporarily to scale back pension benefits for new public employees.
However, the unions spent most of the next 25 years successfully
clawing back much of what they had lost—and then some.Governor
David Paterson’s “Tier V” retirement plan, part of a June 5 deal with
state employee unions, merely reset pension benefits to the levels of
the early 1990s by raising the retirement age to 62; restoring a
ten-year pension vesting period; and requiring employees to contribute
to the pension fund throughout their careers. The governor also vetoed
an extension of the existing “Tier II” retirement plan for police and
firefighters, who can retire at half pay after 20 years, regardless of
age. In its place, he proposed a plan that would set a minimum age of
50 for half-pay retirement after 25 years, which could produce
significant savings for all New York municipalities, especially New
York City.
Real pension reform,
however, would go much further—by essentially throwing out the outmoded
DB model for future employees. New York should follow the lead of a
handful of other states, including Michigan, that have shifted
non-uniformed government workers to defined-contribution (DC) accounts, like the 401(k) plans that have come to dominate the private sector.
Paterson
has estimated that his proposal would save the state and local
governments outside New York City a total of $32 billion over the next
30 years. By comparison, a DC plan like Michigan’s, with the annual
employer contribution capped at 7 percent of payroll, might save at
least $10 billion more. But the greatest benefit of a DC system is that
taxpayers would no longer bear all the financial risks associated with
providing guaranteed pension benefits. For the first time,
public-pension costs would become both predictable and easily
understandable, and the real costs of proposed benefit increases would
be completely transparent. With normal turnover, between one-quarter
and one-third of state and city employees would be in the new system
within a decade.
Of course, if
pension reform were subject to regular contract negotiations,
public-employee unions would never accept a shift to a DC plan from the
guaranteed, ultra-secure DB plan. But this is a rare case in which
elected officials can alter a fringe benefit without the unions’
consent—because the state’s Taylor Law, which governs public-sector
labor issues, specifically prohibits collective bargaining on pensions.
Retirement benefits could be changed legislatively, ensuring that
future generations of New Yorkers aren’t stuck with the same pension
problem.
Unfortunately, as the legislature’s 2009 regular
session wound toward its June adjournment, leading politicians
continued to seek union permission to make any changes. New York City
mayor Michael Bloomberg has repeatedly called for the state to revert
to a system in which pension benefits are collectively bargained, and
Paterson made a series of costly concessions to the unions in exchange
for their agreement not to oppose his modest restructuring of pension
benefits. It’s time for the governor, the mayor, and other elected
officials to reassert their managerial prerogatives—to understand that
government unions will never voluntarily relinquish the gold-standard
pensions that taxpayers can no longer afford.
While
I agree with Mr. McMahon that legacy costs of gold-plated pensions will
remain a massive headache for decades, his solution is to basically
pass the buck to individuals through DC plans.
As I've stated
many times, cheaper DC plans are not the solution since they have been
performing miserably. Also, what's wrong with providing a teacher, a
police officer, a fireman some retirement security?
I say New
York taxes the crooks on Wall Street to fund these public pensions. The
investment bankers, private equity and hedge fund managers have to share the
responsibility for the underfunded status of these pension plans.
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***UPDATE***
E.J. McMahon criticized these reforms stating that Teachers clean up on "pension reform".
I often find myself cheering Governor Paterson; he seems to understand "details" such as... er... addition, subtraction, multiplication... he seems ready, willing, and able to do the math.
BILL
here's an interesting trend in pensions: dump all equities, go 100% bonds.
http://www.bloomberg.com/apps/news?pid=20601087&sid=avWKxGSu0lOo&pos=4
Thanks for that, this is all part of liability-driven investments. On a risk-adjusted basis, corporate bonds are better than stocks, however, they carry their own set of risks. I think pensions will go back to the basics, shunning risky illiquid derivatives and strategies, focusing more on asset allocation (60% stocks, 40% bonds with good exposure to high quality government bonds and inflation-sensitive bonds). I also think pension funds need to focus on TAA more, developing methods to make money off of big macro moves. But this will not do much to make a significant difference in the funding status of most public pension funds. The damage is done, and soon everyone will follow New York's lead, rasining retirement age, increasing contributions and cutting benefits.
Sounds like a nice idea but even the crooks don't have nearly enough money to fund benefits that, absent substantial economic growth, can never be paid in real terms.
I'd like to see all pension plans Mark-to-Market.
The public sector used to receive reduced compensation during their working years in exchange for greater retirement health and pension benefits. This has changed dramatically over the past decade. The average wage is substantially higher than the private sector, in addition to pension and healtcare benefits, in addition to retirement eligibility at a younger age. I have witnessed the move to DC plans and elimination or reduction of DB healthcare to a DC form, and it's not a pretty picture, but it is in-line with the private sector. It's up to us to save.
When "uniformed" State employees (meaning, employees who carry firearms, or who put out fires) are treated differently from (better than) "non-uniformed" State employees (meaning, employees who maintain infrastructure, teach peasant children, or try to regulate rich people's businesses), that shows that the State does not intend to live by its Constitution, but only intends to protect rich people. Such a State is on a short path toward becoming a Failed State.
Sigh,
This is what my father always told me.
If you want to get rich, work the private sector. If you want a steady paycheck and benefits to raise a family, go public sector.
I want a family, I dont want to worry about my next check, so I went public sector.
I am effectively an insurance underwriter. I make $40,000 per year after 6 years on the job. If I was in the private sector I would be making $42,000 to $82,000 per year, and have about the same benefits, other than my pension.
And honestly, if you took the same contributions that my employer and I pay (8.31% of my salary every two weeks) and placed them in a 401k I would probably make out better that way too.
That is what people dont understand. Yes public sector is the last bastion of the Defined Benefit plan, however, we (Not counting Police and Fire) pay a ton for it. How would the private sector retirement system look if you had to pay 8% of your salary and couldnt opt out?
At the end of my career, at age 64 after 34 years of service, I will get a pension worth 100% of my salary. Assuming I do not promote between now and then, that will be the same $40,000 (Not counting inflation) that I make now.
As for the rest of my benefit package, I get Kaiser Medical, and Dental and vision that I pay about $50.00 per paycheck for (~$110.00 per month). If I wanted to buy these plans on my own they would run me about $250.00 per month.
If you take away pensions, and at the same time dont give us salaries that are comparable to the private sector, why the hell would anyone work low level government jobs?
Meanwhile, by giving us pensions, you can scream all day how we have benefits that make up for the 50% wage discrepancy between public and private sector, but not really.
And take away the benefits, then pay us private industry salaries and all of the sudden you have the Governator making ~200 million+ per year... how would that go over. (He is the head of a corporation with roughly 100,000 employees that makes roughly 87 billion a year in gross revenues)
"Public Sector" employment is contradiction in terms.
The "Public Sector" number of employees could be cut 50% today, saving trillion.
Comparisons to private sector employment are totally invalid and serve no purpose whatsoeever than to make public sector employees a convenient scapegoat, when i8n reality most public sector employees I have met wouldn't last a week in a private sector job. That's why politicians go into politics: they can't hack it in the real world so they created this financially beneficial alternate reality wherein they fuck things up beyond all comprehension and are paid ridiculously high salaries, receive lucrative pensions, benefits and perks, get raises while they fail, and have put an enormous burden on the private sector, without which they wouldn't even exist, to pay for it all.
Fuck 'em.
Actually, you cant cut public sector employment by 50%. The public will not stand for it. Look at the outcries happening now when we go to cut services (Not salaries, services). City and County government meetings are packed with the public (Not just public servants, private citizens) telling them, NO you may not cut off this or that program. Private citizens demand the services we provide and get all irrate when we try to cut them back to save money.
As for "rediculously high salaries", I am sorry but what planet do you live on. Compared to their private sector peers, public sector employees make substantially less pay and it just gets worse the higher up the chain of command you go. (Until you get to elected officials) Compare your city or county or state or even federal level employee to an employee of a private company of comparable size and then try and tell me with a straight face that public sector makes more money. If this was true the Governator would be making 200+ million per year and O'bama would be making billions per year... Heck in my county, which has a roughly couple of billion dollar a year budget our CAO (Equivalent to CEO) makes $270,000 per year and has 17,000 employees under them. The head of my department, with 1,700 of those employees makes $140,000 per year. The head of my region with ~450 of those employees makes $72,000 per year. The head of my division of that region, with ~100 of those employees makes $56,000 per year. My supervisor with ~15 of those employees makes $45,000 per year, and I make $40,000 per year.
The head of our local county hospital (Which has actually made money for the last 5 years), makes $220,000 per year, they have 2000 employees.
The head of a private local hospital, of comparable size, that lost money for 3 of the last 5 years, made $1.7 million...
Now, as for Defined Benefit versus Defined Contribution plans. Defined Benefit plans usually do NOT allow an opt out, are professionally managed, and because of which guarantee a specific pay out based on years of service and age at retirement - no matter how the professionals that managed the fund did in the mean time.
Defined Contribution plans usually allow an opt out (For those foolish enough to do so), are managed by amatuers, and have pay-out plans that pay according to how much is in them after 30 years of the amatuer management.
Sounds to me like defined contribution plans were created by Wall Street and business leaders as a way of stealing even more money from their employees easier. Especially since most defined contribution plans restrict what you can invest your money in, and then charge utterly outrageous fees on those choices, oh and then declare bankruptcy and steal whatever gains were in them in the first place...
Don't be a dick. There's plenty of incompetent private sector workers too - in point of fact, you may be shocked to learn that nearly 50% of all employees have below-average performance. I'm not sure exactly what these 'private sector' jobs are that you say the public workers couldn't hack, but it seems to me that a secretary is a secretary and a clerk is a clerk, regardless of who pays their salary. If you're suggesting that most public sector employees couldn't make it as an entrepreneur, well, most private sector workers couldn't either (that's why they have a job, after all).
In short, you're pushing your ridiculous perspective in response to a thoughtful post about the tradeoffs of working public vs. private sectors.
Fuck you.
Not so many politicians are fiscally responsible,but it seems that Paterson is one of the few. Humble and legally blind,I have watched him insisting on balancing the budget despite all the problems with his state congress. i think he can't be bought or threatened by a scandal(he stated right out from the beginning that he had extramarital affairs so did his wife). I hope he can serve more on a national level............
Pay the investment bankers, private equity and hedge fund managers a % of any upside. No upside, no payment.
Charge them a % of any downside losses. Losses = you lose, too.
If you are a banker and it makes you feel better, think of it is an auto-swap.
Funny that people managing hundreds of billions in taxpayer pensions didn't think of this, huh? It's not like they were investing "a couple of bucks".
Wouldn't be a bad idea to protect retail investors this way, too?
It's amazing what some people will do for a billion dollars.
all the best
Namke von Federlein
Step in the right direction.