The pension benefit offered to NYS public employees is called a defined benefit plan as it is determined by a set formula, based on tier, years of credited service, final average salary and age. It is NOT based on contributions. The pension benefit is guaranteed for the employee’s lifetime, or depending on the option chosen at retirement, the lifetime of the beneficiary.
Politicians have recently suggested, and top government officials, including Governor Cuomo, have recommend, that a new tier should be created and that NYS should discard the present defined benefit plan and institute a 401(K)-style defined contribution plan. Many insist that defined benefit plans are too expensive. With a 401 (K)-style plan, employees deposit part of their salary into a retirement savings account. There are no federal tax or interest dividends earned until the funds are withdrawn after retirement.
Employers began offering pre-tax retirement savings plans approximately 30 years ago as a way to reduce taxable and SUPPLEMENT retirement income- NOT to replace traditional pensions. Defined contribution style plans do not provide the same level of financial security as defined benefit plans do. The retirement income is simply based on the funds in the account when the person retires. Since these earnings are usually tied to the stock market, the amounts are vulnerable to fluctuations and volatility.
Dollar for dollar, defined benefit plans are more cost effective and do a much better job of providing retirement security for workers. All public employees deserve a secure lifetime benefit for their years of service to the public, whether it is local, state or federal service.
The available data from multiple financial sources clearly show that 401 (K)-style plans are inadequate, and yet their popularity continues in the private sector. That popularity is used as rationale for reducing public sector pensions. It’s as if the “Race to the Bottom” is unavoidable.
Government should be aspiring to improve the economic security of all its public employees, not take it away. The top priority that government should be concerned with is the creation of jobs and not reducing the economic security of its future employees. By adding an additional pension tier to the mix, is government’s way of distracting the attention of job creation and vilifying the public employees pension system.
Many supporters of a new pension tier argue that the present NYS pension system is unsustainable. What IS unsustainable is a society where each generation of middle class workers retires with less and less financial security that the one before. Pensions are long term benefits of the public employee and should not be overhauled with every change in the political wind.