Letter: Danger in altering pensions
Stock image of money, dollars, puzzle, dollar bills, hands, pension, one dollar, coins, piggy bank, broken Credit: Photo by Istock
Newsday's editorial supporting Gov. Andrew M. Cuomo's call for pension reform was right on the mark ["Pension myths distort debate," March 8]. It is clear that taxpayers have reached their breaking point. However, the plan to switch from defined-benefit plans (stable government pensions) to defined-contribution plans (forms of 401(k)s) for new government employees needs to be carefully examined.
Retirements were supposed to rest on three legs: pensions, Social Security and private savings. To encourage private savings, the government created 401(k)s and individual retirement accounts. These voluntary, tax-deductible plans were never meant to replace pensions, but to supplement them.
We all know that many corporations are eliminating their pensions in favor of 401(k) plans. But we should be pushing employers to adopt more traditional pensions.
There are many reasons why 401(k)s and IRAs may not provide reasonable security in retirement. First, they transfer the risk of investment losses to the employee. But faced with a wide choice of investment vehicles, employees tend to invest too conservatively, leading to lower yields. This will prevent them from reaching their retirement goals. Some will take on too much risk, leading to the same result. And since these plans are voluntary, some will not invest at all. Government pension funds tend to get higher yields because of their size and lower expense ratios.
Also, 401(k)s and IRAs have much higher fees, leading to much lower investment returns over a long period.
But the main reason for not switching from pension plans is that the ability to retire with reasonable security should not be based on the state of the financial markets at any particular time. Markets go up and down, but over the long run, they should produce a reasonable return. The problem is that individuals don't retire over the long run, they retire in a specific year. If the markets are down, that could ruin their plans.
For example, many baby boomers are retiring now. Those with 401(k)s and good financial advisers would have planned for a 7 percent annual return. That means money must double every 10 years to reach their goals. The markets are just now returning to levels reached 10 years ago. Many 401(k)s are even lower than they were in 2002. How can these people retire now?
Many of the governor's proposals need to be adopted. Employee contributions should be raised and paid in over a longer period. We need to take a critical look at how final compensation is calculated, especially the use of voluntary overtime. Length of service, retirement age and portability should also be examined.
The governor's proposed Tier 6 would make 401(k)s just one option; however, asking public employees to rely solely on 401(k) savings would burden them with too much risk and defeat our goal of secure retirements for our citizens.
Editor's note: The writer is the former Nassau County comptroller.
