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Will Cuomo truly fix pensions!! 18-2011
Posted On: May 18, 2011

Will Cuomo truly fix pensions

Last Updated: 9:34 AM, May 18, 2011

Posted: 10:49 PM, May 17, 2011

Gov. Cuomo seems close to unveiling his promised pension-reform plan for New York's state and local governments. But will it be the kind of proposal New York needs -- one that permanently shifts retirement benefits for public employees to a new, more sustainable path? Based on what's been leaking from the governor's office this week, the answer is still unclear.

At a minimum, Cuomo reportedly is mulling a series of changes to the existing public-pension model for new hires. News accounts suggest his plan would raise the retirement age from 62 to 65, double employee contributions from 3 to 6 percent of salary, eliminate a benefit-bonus "multiplier" for longer-term employees and reduce the "pensionable" salary base by, among other things, excluding overtime pay.

In sum: Much like what we've got, but potentially (eventually) a lot cheaper. Maybe.

The problem is that this approach has been tried before -- and it hasn't worked. In the face of union lobbying, past attempts to rein in pension costs have been largely undone by subsequent "sweeteners." Fertilized by bull markets on Wall Street, public-pension benefits have a way of growing back like dandelions after a spring shower.

If Cuomo proposes a "reform" plan limited to changes in the existing defined-benefit pension system, he'll fail to address the fundamental problem.

Under current government accounting rules, public-sector pension funds can price constitutionally guaranteed (and thus risk-free) benefits based on hoped-for returns from risky investments. When those investments don't bring the (optimistically) expected return, or when asset values crash as they did in 2008-09, taxpayers are left to pick up the slack -- just when they can least afford it.

The one way to truly reform public pensions -- to protect taxpayers from open-ended financial risk, uncertainty and volatility -- is to shift to a defined-contribution (DC) approach, such as the 401(k) model that predominates in the private sector.

Taxpayers now shoulder all of the risk associated with public-pension benefits. A DC plan would shift the downside risk -- and upside investment gains -- to the workers themselves. At the same time, taxpayer support for retirement funds would be set at a steady, predictable level -- eliminating the threat of long-term liabilities.

Unlike traditional pensions, DC retirement accounts would be fully portable, moving with workers when they change jobs. While it takes at least a decade to vest in a public pension, the assets in a DC plan typically belong entirely to the employee after as little as a year.

And the federal tax code allows penalty-free withdrawals from DC accounts starting at age 59 1/2 -- an appealingly flexible alternative for workers who'd rather not be chained to a desk in a government office or classroom until they reach 65.

No DC plan could replicate the pension benefits of the current system on a guaranteed basis. But a well-designed, well-financed DC retirement account, supported by regular employer and employee contributions, can provide solid and steady benefits at a level that would still look gold-plated compared with the typical underfunded private-sector plan.

If Cuomo is still open to proposing a DC retirement plan for public employees -- and by some accounts, he is -- he need not look far for a model. Since the mid-1960s, New York has been sponsoring one of the nation's largest public-sector DC plans -- through the State University of New York.

Of roughly 30,000 SUNY employees who were eligible to join a retirement plan last year, more than 21,000 (including nearly three-quarters of unionized faculty members) had voluntarily opted for DC accounts such as those offered by TIAA-CREF, the huge teachers' and professors' pension fund.

Opening the SUNY optional plan to all state and local workers would be a step toward truly transformational pension reform. It also would set Cuomo apart from governors who have been content to tweak their states' DB plans while staying far away from the DC model.

So far, Cuomo is hiding the ball on pension reform. We'll soon learn how far he really intends to move it.

E.J. McMahon is a senior fellow at the Manhattan Institute's Empire Center for New York State Policy.

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