Tier 6 Pension Reform
Myth vs. Reality
Myth 1: Creating a Tier 6 pension plan is an effort to “demonize” public
Reality: Public employees are the ones being hurt most by the out-of-control
growth in pension costs for the local governments and their taxpayers. Rapidly
rising pension costs crowd-out the ability of local governments to provide
essential services and appropriately compensate and maintain the workforce
necessary to provide such services. Tier 6 will produce long-term stability in
public employer pension costs and, similarly, promote stability for public
Myth 2: Our public pension benefits in NY are meager and therefore should
continue to be guaranteed, at their current benefit levels, for generations to
come. Requiring new public employees to contribute a larger share toward the
cost of their pension is unfair.
Reality: NY’s public pension benefits are among the most generous in the nation
and 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 three
Myth 3: Yes, but current employer contributions are not high from an historical
Reality: False. Over the past twenty years, annual pension contributions by
NY’s public employers have averaged $1.3 billion. Today’s contribution level for
employers is $4.2 billion – 212% higher than the two-decade average.
Meanwhile, employee contribution levels are essentially identical to twenty years
ago: $286 million today compared to $287 million in 1992, and actually below
the historical average of $295 million. Furthermore, U.S. Census data ranks
NY’s public employees 48th in terms of relative level of employee contributions to
Myth 4: New York’s pension system isn’t broken. There is no need to reform
one of the best-funded public pension funds in the nation.
Reality: While our pension system is strong from a funding perspective, it is
breaking the backs of taxpayers. The pension system is unsustainable in its
current form as it fails to reflect taxpayers’ ongoing fiscal capacity to fund the
Myth 5: Implementing a Defined Contribution plan in NY will be too complicated
and too costly for the Retirement System and state/local government employers.
Reality: The New York State and Local Retirement System currently bills and
collects $114 million in charges from state and local government employers (i.e.,
The Taxpayer) to fund its administrative budget. This represents a 61% increase
between 2006 and 2011. The NYSLRS has more than enough resources and
expertise to smoothly implement a Tier 6.
Myth 6: Employer contributions are minimal since the vast majority -- currently
83% -- of pension benefits are funded through market returns on system
Reality: The very fact that NY’s public pension system, which guarantees a
“defined benefit,” relies heavily on an unpredictable and inconsistent revenue
source (i.e., investment returns), is what causes public employers and their
taxpayers to be a fiscal “backstop” when investment returns don’t meet actuarial
expectations. Taxpayers need a more predictable and affordable pension benefit
structure in New York. Public employers pay 16% of the cost of public pension
benefits and the amount they pay has risen by $3.8 billion (1,000%) over twenty
years. Meanwhile, public employees pay 1% of the cost of their pension benefits
and the amount they pay has remained very stable over the entire twenty-year
period. In fact, according to U.S. Census data, there are only two other states in
the nation whose public employees contribute less to their pension than public
employees do in New York.
Myth 7: Defined Contribution plans are inherently risky and not intended to be a
comprehensive retirement plan, but rather a supplement to defined benefit
Reality: Longstanding voluntary participation by SUNY, CUNY and Federal
government 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 between
Defined Benefit and Defined Contribution pension plans.
Reality: The Tier 6 proposal is about options for new employees. The
Retirement System, employers and employee unions will play a key role in
ensuring that their members make educated decisions when choosing between a
DB and a DC plan.