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Tier 6 pension reform myth vs reality


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Tier 6 pension reform myth vs reality

  1. 1. Tier 6 Pension Reform Myth vs. RealityMyth 1: Creating a Tier 6 pension plan is an effort to “demonize” publicemployees.Reality: Public employees are the ones being hurt most by the out-of-controlgrowth in pension costs for the local governments and their taxpayers. Rapidlyrising pension costs crowd-out the ability of local governments to provideessential services and appropriately compensate and maintain the workforcenecessary to provide such services. Tier 6 will produce long-term stability inpublic employer pension costs and, similarly, promote stability for publicemployees.Myth 2: Our public pension benefits in NY are meager and therefore shouldcontinue to be guaranteed, at their current benefit levels, for generations tocome. Requiring new public employees to contribute a larger share toward thecost of their pension is unfair.Reality: NY’s public pension benefits are among the most generous in the nationand have rapidly become unaffordable to taxpayers. Over the past two decades,taxpayer-funded contributions to pensions by state/local employers (ERS/PFRS)have increased from $357 million to $4,165 million – an increase of $3.8 billion(or 1,067%) – and are expected to rise an additional 33% over the next threeyears.Myth 3: Yes, but current employer contributions are not high from an historicalperspective.Reality: False. Over the past twenty years, annual pension contributions byNY’s public employers have averaged $1.3 billion. Today’s contribution level foremployers is $4.2 billion – 212% higher than the two-decade average.Meanwhile, employee contribution levels are essentially identical to twenty yearsago: $286 million today compared to $287 million in 1992, and actually belowthe historical average of $295 million. Furthermore, U.S. Census data ranksNY’s public employees 48th in terms of relative level of employee contributions totheir pensions.
  2. 2. Myth 4: New York’s pension system isn’t broken. There is no need to reformone of the best-funded public pension funds in the nation.Reality: While our pension system is strong from a funding perspective, it isbreaking the backs of taxpayers. The pension system is unsustainable in itscurrent form as it fails to reflect taxpayers’ ongoing fiscal capacity to fund thesystem.Myth 5: Implementing a Defined Contribution plan in NY will be too complicatedand too costly for the Retirement System and state/local government employers.Reality: The New York State and Local Retirement System currently bills andcollects $114 million in charges from state and local government employers (i.e.,The Taxpayer) to fund its administrative budget. This represents a 61% increasebetween 2006 and 2011. The NYSLRS has more than enough resources andexpertise to smoothly implement a Tier 6.Myth 6: Employer contributions are minimal since the vast majority -- currently83% -- of pension benefits are funded through market returns on systeminvestments.Reality: The very fact that NY’s public pension system, which guarantees a“defined benefit,” relies heavily on an unpredictable and inconsistent revenuesource (i.e., investment returns), is what causes public employers and theirtaxpayers to be a fiscal “backstop” when investment returns don’t meet actuarialexpectations. Taxpayers need a more predictable and affordable pension benefitstructure in New York. Public employers pay 16% of the cost of public pensionbenefits and the amount they pay has risen by $3.8 billion (1,000%) over twentyyears. Meanwhile, public employees pay 1% of the cost of their pension benefitsand the amount they pay has remained very stable over the entire twenty-yearperiod. In fact, according to U.S. Census data, there are only two other states inthe nation whose public employees contribute less to their pension than publicemployees do in New York.Myth 7: Defined Contribution plans are inherently risky and not intended to be acomprehensive retirement plan, but rather a supplement to defined benefitpensions.Reality: Longstanding voluntary participation by SUNY, CUNY and Federalgovernment employees in Defined Contribution plans -- that ARE NOT 401(k)plans --has proven successful from both an employee and employer perspective.Myth 8: But individuals can’t be trusted to make the correct choice betweenDefined Benefit and Defined Contribution pension plans.Reality: The Tier 6 proposal is about options for new employees. TheRetirement System, employers and employee unions will play a key role inensuring that their members make educated decisions when choosing between aDB and a DC plan.