Should public-employee pensions operate more like private 401(k) plans?
Conservative analysts say "yes," adding that rising costs of traditional public pensions could become unsustainable.
"It makes the taxpayers bear an enormous financial risk, and we're about to pay the piper," said E.J. McMahon, director of the Empire Center for New York State Policy, an Albany think tank.
New York's public pensions, like those in most states, operate as "defined benefit" plans. That is, state and local government workers are promised specific, defined pension payments.
Payments flow from investments made by the state's pension systems. When investment values drop - as during the 2008 stock market crash - government employers, and ultimately taxpayers, must increase contributions to pension plans to make sure retirees get guaranteed benefits.
Private 401(k) plans, on the other hand, operate as "defined contribution" plans. Enrolled workers and/or employers contribute a certain defined percentage of salaries.
Such plans do not guarantee specific pension payments. What retirees get depends on growth of their 401(k) investments, which can fluctuate broadly.
Keith Brainard, research director for the National Association of State Retirement Administrators, says the biggest problem with defined-contribution plans is that retirees risk running out of money.
"This nation is facing a retirement crisis - in part, because private employers have abandoned the defined-benefit plan," Brainard said.
A few states - notably, Michigan and Alaska - recently have moved toward enrolling new government workers in defined-contribution plans. There is little such movement in New York, except among city and state university employees, because most other public workers prefer to hold on to traditional pensions.
New York has opted for more limited changes, such as increasing the number of years new workers contribute to pension plans and raising by two years to age 57 the point at which teachers can take early retirement without a reduction in benefits. In addition, Gov. David A. Paterson and State Comptroller Thomas P. DiNapoli have proposed legislation allowing government employers to spread out, or amortize, increased pension costs over 10 years.
Even states that adopt defined-contribution plans do not necessarily save money unless they also reduce contributions. For private employers, moving to 401(k) plans has tended to have this effect of reducing contributions.
Typically, private employers contribute half as much as workers to 401(k) plans, while government employers contribute more than their workers to defined-benefit plans.