New York's vexing pension puzzle

Something's got to give.

New York's public-employee pension system is more solvent than most, but it's also way more generous. At a time when most New Yorkers are struggling to fund a 401(k) -- and many consider themselves lucky to have a job -- teachers, cops and other government workers can enjoy retirement at a relatively young age with ironclad health and retirement benefits.

Public servants deserve to be compensated fairly, but that doesn't mean they should be treated better than the taxpayers who employ them. Unfortunately, benefits for government employees are constitutionally protected, and so can't be diminished for workers already in place. It will take years before these expenses can be reined in by applying new rules to new hires.

Thus, in the years ahead, Long Island taxpayers are looking at a staggering bill for the pensions of local public employees. In the next 12 months, for instance, we'll have to pay $1.25 billion, an increase of 40 percent over the previous such period.

But these payments are not the end of the world. The truth is that we have to pay all this money now because, for a long time, we paid in little or nothing. Pensions for public employees in New York are largely paid from the investment returns on money previously contributed (mostly by taxpayers). And for years, investment returns were strong. That enabled localities to contribute little from 1991 to 2004.

But thanks to the financial crisis of 2007-08, the state's pension funds took a hit, as did every other major investment fund. Since New York thankfully is stricter than many states about keeping its system fully funded, local governments and school districts now have to ante up.

To smooth things out, in 2004 the state adopted a requirement that local governments kick in at least 4.5 percent every year, no matter how good the investment returns. (The rule doesn't apply to the teachers' pension system.)

Keeping the contributions flowing even when investment returns are booming is a great idea because when the stock market goes bad, the economy often does too, slashing tax revenue. Thus, localities must come up with a lot more money precisely when they can least afford it.

That's the situation today. Higher pension payments in future could be especially problematic under a property-tax cap proposed by Gov. Andrew M. Cuomo. Local school districts and governments, unable to raise taxes, might have to cut into services or lay off employees in order to fund their pension obligations.

All that said, the reasons New York's generous public-employee retirement benefits are unsustainable are as much political as financial. In recent years, working for the government has become a pretty good deal compared with working in the private sector. And taxpayers have noticed.

Start with pensions. Nationally, fewer than one in seven private-sector workers participates in an old fashioned "defined benefit" plan of the kind once common at large companies. These are plans -- enjoyed by virtually all public employees in New York -- funded largely by employers. Instead, most companies have moved to a 401(k)-type plan, whereby employers typically match part of what employees put in.

A reasonably frugal person ought to do just fine with such a self-directed plan. But in reality the outcomes are vastly worse. Most of us aren't much good at saving or investing, and a well-run defined benefit fund has advantages that individual investors can't match.

Not only do public employees enjoy great pensions, but they can retire younger thanks in part to health benefits that cover the pre-Medicare years -- benefits other taxpayers don't have. And New York's public employees have been largely insulated from the rising cost of health coverage, which therefore doubly afflicts taxpayers, who must pay their own premiums and those of civil servants too.

Public employees in New York enjoy a pension system that is especially generous even by civil service standards. Sylvester J. Schieber, a respected pension consultant, found that New York's system replaces 77 percent of an average participant's salary, which makes it the second-most generous in the country after Colorado. Our state pension benefits are also exempt from state income taxes.

Teachers and other public employees also enjoy more job security than private sector workers, a valuable benefit nowadays. Public employees even seem to get steady raises when other workers don't, thanks to legal and contractual provisions they've won over the years.

So the time is ripe for reform. The state's constitution makes it nearly impossible to change even prospective pension benefits for existing public workers. But the Cuomo administration is working on new pension rules, known as Tier 6, for new hires. These will probably include a later retirement age and higher contributions from employees. We hope it will also end at last the infuriating practice of pumping up pensions with final-year overtime and other sweeteners.

Some wrinkles in these pensions are negotiated locally, and change is needed there as well. Local officials will have to get tough and stop agreeing to special pension programs that allow, for example, retirement after just 20 years on the job.

Public employees deserve fairness. No less. And no more.