Empire State Watchdog Group Calls for Benefit Cutbacks

May 2, 2005 (PLANSPONSOR.com) - A private financial watchdog for New York city's and New York state's governments has recommended that both freeze their current defined benefit pensions and migrate new employees to defined contribution programs instead.

In calling for the DB to DC switch, the C itizens Budget Commission (CBC) argued thatEmpire State and New York City officials can longer support the current level of pension and health benefits as being required to lure and retain key employees.

“Generous pension benefits for City and State workers can no longer be justified on the ground that these workers’ wages are lower than in the private sector, because for mostoccupations wages in the public sector are higher than in the private sector,” the CBC asserted in a report .“Changesin pension benefits for future workers would yield fiscal gains onlyslowly, but the service to the future fiscal health of the City and State would be enormous. The long-run goal of pension reform should be to convert from defined benefit to defined contribution plans. Eventually, all City and State workers should have defined contribution plans and the current system should fade away.”

Compared to other public-sector pension plans with defined benefits, New York city’s and state’s are relatively generous in the limited employee contribution they require, the inclusion of overtime in calculating benefits, and the frequent granting of disability status to some uniformed workers, the CBC said in a Web site statement about its recommendations.

Some cutbacks are necessary simply because of the pension costs to the city and state, the group contended. According to the CBC, required city contributions to pension funds tripled, rising from $615 million in fiscal year 2000 to $2.3 billion in fiscal year 2004. They are projected to double again by fiscal year 2008, reaching $4.7 billion. Similarly, required pension fund contributions from the State jumped from $218 million in 2000 to $592 million in 2004, and are projected to double to nearly $1.4 billion in 2008.

The CBC said it isn’t necessarily suggesting a DC employer match that is below the average currently being paid under defined benefit programs, but suggested that the amount is best worked out in collective bargaining talks.

DC plans have two advantages, the group asserted:

  • DC plans facilitate worker mobility, while defined benefit plans typically reward (and even require) longevity. “Under a defined contribution plan, benefits can be vested almost immediately, and the benefits are not disproportionately greater as one approaches retirement age. This is good for the workers and for society, because a mobile workforce is increasingly essential in a modern economy,” the report said.
  • Defined benefit plans create a political dynamic that places the taxpayers in double jeopardy. “Unions have the advantage of being able to seek pension enhancements via collective bargaining, but can then go directly to the State Legislature which can enact benefit enhancements over the opposition of the mayor or governor, with whom the union would otherwise have to bargain,” the group wrote.

Changes should also be contemplated for the city and state’s employer health insurance payments for workers and retirees, the CBC claimed. The City and State provide both early retirees and those over 65 and their families with health insurance. Each group should continue to receive such benefits, but under terms that more closely resemble the practices of other large employers, the group recommended.

Specifically, the group asserted that:

  • Retirees should be required to pay 50% of the premium for health insurance for themselves and their dependents.This contrasts with the current practice of no required contribution for City retirees and more modest current contributions from State retirees.
  • The city and state should stop reimbursing retirees for Medicare Part B premiums. " This practice is out-of-line with benefits provided by other large employers and contradicts the philosophical and cost saving goals behind the premium requirement established by Congress as part of Medicare's design," the group wrote.

CBC recommendations also included that the city and state:

  • Raise the minimum retirement age. Currently, police and firefightershave no minimum age, and for most other workers it is 62 or 57 for full benefits and 55 for reduced benefits.
  • Base pension benefits on the more standard definition of final average salary.Currently,the systems define final average salary in ways that inflate benefits, deviate from the goal of replacing a reasonable share of a worker's base salary, and are far more generous than the practices of other large employers. The final average salary should be based on five years' experience and should take into account only base salary, excluding overtime and other supplements, the group asserted.
  • Define work-related disabilities more rigorously.The current system permits workers toclaim disabilities at the time of retirement and defines work-related disability, especially for certain uniformed workers in New York City, in ways that broaden access to this benefitwithout clear evidence of a work-related cause.
  • Eliminate the variable supplements available to some retired New York City uniformedworkers. Wrote the group: " These annual payments or Christmas bonuses, soon to be $12,000, supplementalready generous pensions, create inequities between New York City and other uniformedworkers in the State, and contradict the principle that pension payments should be a regular and predictable sources of income for retirees."