Study: NY Should Consider DC Option

December 29, 2003 ( - If state and local governments of New York want to save money on their retirement plans, they should consider switching their traditional pension plans to a defined contribution plan.

That is due to the reliance defined benefit plans have on strong investment returns to provide for the guaranteed retirement benefit of long-term workers. Thus, w hen investment returns sink – as state and city pension funds did starting in 2001 – employer contribution must rise to pick up the slack. Conversely, when the rate of return rises above projections, employers may temporarily get to contribute less, t he think-tank Manhattan Institute said in a New York Post report.

New York City’s pension costs personify these figures. Since 2001, municipal pension costs have more than doubled, growing by over $1.3 billion, and the future does not look any brighter. The city expects pension contributions to jump from $2.5 billion in fiscal 2004 to $4.3 billion by 2007.

“Taxpayers would no longer bear the risks associated with market downturns,” the report said. “Public pension costs for the first time would become both predictable and easily understandable, and the real costs of proposed benefit increases would be completely transparent, rather than obscured by complex actuarial calculations,” the institute said in proposing its defined contribution plan.

Under the Manhattan Institute’s plan, state and local employees would contribute at least 3% of their salaries and employers would contribute at least 5%. Employers would then match up to 2% in additional employee contributions for a maximum total of 12%.

In turn, the implementation of this plan would reduce the pension costs for state and local governments by an estimated $1 billion in fiscal year 2004. Additionally, New York City’s pension costs in fiscal 2004 would be reduced by an estimated $600 million.

The move by New York would not be that rash either. The report points to similar endeavors being phased in as the sole pension for state government employees in Michigan and as an option in Florida. Further, a defined contribution plan also has been the retirement vehicle of choice for most employees of public higher-education systems throughout the country, including both the State of New York and City of New York university systems.