Defined Benefit Retirement Plans contrasted with Defined Contribution Retirement Plans for New York State public employees

Defined Benefit Retirement Plans contrasted with Defined Contribution Retirement Plans for New York State public employees

Source:”Passing The Pension Bomb by EJ McMahon and Josh Barro, published by the Empire Center for New York State Policy [SR8-11]

In their “white paper”Passing The Pension Bomb* EJ McMahon and Josh Barro report on New York's “Exploding Pension Cost,” focusing on New York State’s defined benefit public retirement systems, the authors indicate that “While a growing number of states have been making changes to their pension systems—including 11 in 2010 alone — pure DC [defined contribution] plans so far have been mandated in only two states, Michigan and Alaska. In the wake of the November 2010 election, at least six newly elected governors in other states were 'looking favorably at some form of 401(k)-style retirement plan for public employees, adding to the momentum building nationally for a shift away from traditional guaranteed pensions,' the Pew Center’s Stateline web site recently reported.”

Noting that:

“• Tier 1 benefits are available to all employees hired before June 30, 1973;

“• Tier 2 covers all employees hired on or after June 30, 1973 and before July 27,1976;

“• Tier 3 covers employees hired on or after July 27, 1976, and before Sept. 1, 1983;

“• Tier 4 includes all employees hired on or after Sept. 1, 1983, and before Jan. 1, 2010; and

“• Tier 5 covers employees hired on or after Jan. 1, 2010”

McMahon and Barro suggest that [New York] State officials should not settle for creating a “Tier 6” that incrementally adjusts some existing pension parameters while preserving a fatally flawed system that exposes taxpayers to potentially open-ended liabilities, implying that serious consideration should be given to creating a defined contribution retirement plan.

The report addresses only New York’s public retirement systems and thus does not consider the defined contribution retirement programs now in place and available to certain employees of the State University of New York, certain employees of the State Department of Education and certain employees in the State's community colleges, among others. Significantly, these “Optional Retirement Programs** are not public retirement systems.***

Using these defined contribution plans as models, consideration could be given to the establishment of similar plans in lieu of the tradition NYSERS, NYSTRS and other public retirement systems of the State’s Defined Benefit Plan models now in place and periodically "revised" via the creation of new "Tiers" for new employees of New York State and its political subdivisions.

A viable DCP plan for employees of the State and its political subdivisions could provide that:

1. All new employees becoming members of the New York State Employees’ Retirement System and similar public retirement systems of this State would participate in a DCP;

2. Employer and employee contributions for the DCP would be negotiated through collective bargaining;

3. Employees in the DCP would “vest” immediately;

4. Current members of a public retirement system would be permitted to elect to become members of the appropriate DCP; and

5. The existing public retirement systems would administer their respective DC plans by essentially expand the existing “employee contribution” operations of the systems, with, perhaps, a variable annuity option.

* Posted on the Internet at http://www.rpea.org/news/documents/PensionExplosion.12.20102.pdf

** These several Optional Retirement Programs include, for example, the plan established in 1965 pursuant to the Education Law available to certain employees of SUNY, the Statutory Contract Colleges at Cornell and Alfred Universities, and community colleges [see Education Law §390 et. seq.]

*** Education Law §396.