McMahon: Don't believe Cuomo's pension hype

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E.J. McMahon

E.J. McMahon is a senior fellow for the E.J. McMahon

E.J. McMahon is a senior fellow at the Manhattan Institute

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Gov. Andrew M. Cuomo's hype machine went into overdrive late last week after the Legislature passed a scaled-back version of his Tier 6 pension reform plan.

Cuomo said the result was "bold and transformational . . . a historic win for New York taxpayers and municipalities."

A more accurate description would have been "an incremental improvement on what we've got . . . and better than nothing."


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The bill creates a new public pension plan that's roughly one-third less costly for employers than the Tier 5 plan adopted just over two years ago. The new plan achieves this mainly by shifting a larger share of pension costs to future employees, through an increase in contributions deducted from their paychecks.

Unions cried foul, but the benefit reduction for new workers will be slight. The retirement age will be nudged up one year, from 62 to 63, and a general employee with 35 years of service will be guaranteed 65 percent of final average salary, instead of the 67.5 percent available under Tiers 4 and 5. While retirement severance payouts will be excluded from the pension base, police and others approaching retirement can still pad their benefits by choosing work schedules that generate extra pay, including the same generous overtime allowance provided by Tier 5.

Cuomo says Tier 6 will save $80 billion over 30 years, but this needs to be taken with a big grain of salt. Tax-funded pension costs will continue to increase over the next few years, because the changes apply only to employees hired on or after April 1. Tier 6 will take more than a decade to generate significant savings compared to what it is replacing.

Long-term savings projections assume benefits will be left absolutely unchanged for the next 30 years. But state lawmakers have been tinkering with pensions for decades, and government unions certainly won't stop lobbying for more now.

The only way to break decisively with this cycle is to shift to a whole different structure, such as the individualized and portable defined-contribution retirement accounts popular among State University of New York employees. In the end, however, Cuomo was able to deliver a defined-contribution plan only as an option for higher-paid nonunion employees. It's a nice step in the right direction, but he should have pushed for more.

There's one more, widely overlooked piece of Tier 6 law that might actually qualify as "transformational," but not in a good sense.

Near the end of the law are three curious sections headed "Benefit Enhancements," which give most unions representing state workers, New York City employees and teachers an avenue to petition for a revised plan allowing Tier 6 employees to retire and collect full pensions at age 57 after 30 years on the payroll. The governor alone (or, in New York City, the mayor) will have discretion to grant such requests. In the wrong hands, this power could be abused by executives pandering to large, well-organized voter blocs.

The cost of any benefit enhancement is supposed to be covered entirely by "additional member contributions." The problem is that these amounts will be calculated on the basis of the pension systems' already dubious accounting methodology, creating a risk that early retirement will be underpriced and lead to substantial unfunded liabilities. The same concern applies to another Tier 6 provision requiring the state to pick up the cost of any future pension sweeteners. Sounds good, on the surface, but the fuzzy math of the pension system will still make it too easy to sell big benefit increases, to themselves and the public, as a free lunch -- as then-Gov. George Pataki and the legislature did in 2000.

The fundamental flaw in New York's public pension system remains unresolved: Like similar systems across the country, it exposes taxpayers to massive open-ended financial risk.

Unfortunately, Cuomo has not even acknowledged this problem, much less fixed it. So we're still waiting for a true transformation.

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

 

This is a corrected version of the column. An earlier version misstated the percent of final average salary available under Tiers 4 and 5.