We hear all the time about exorbitant pensions, which lead many to believe mistakenly that retired nurses, firefighters, teachers and others are wealthy. We don't hear that the average benefit for a member in the largest plan in New York -- the New York State and Local Retirement System -- is $19,000 per year, or that 76 percent of pensions are less than $30,000 per year.
There is no doubt that state and local governments face difficult budget decisions, which have brought all spending, including pensions, under greater scrutiny. But the new proposal for an additional pension tier would not produce any savings to help address the current budget deficit.
The new pension tier includes an "optional" 401(k). In reality, there is no option in this plan, as the new tier would obliterate the defined-benefit plan, slashing benefits and making employee contributions unaffordable. The new defined-benefit under a Tier 6 would require employees to work longer, pay up to double in their base contributions, and pay even more if the stock market declines -- all to receive less in their pension.
Supporters of a new pension tier argue that the pension system is unsustainable. What is unsustainable is a society where each generation of middle class workers retires with less financial security than the one before. The 90 years that the state has been providing pension benefits demonstrates that the system works. Pensions are long-term vehicles that should not be overhauled with every change in the political wind. Nevertheless, public employee unions did their part and agreed to a new pension tier just two years ago that is projected to save $35 billion over 30 years. This is on top of wage freezes, furloughs, increased health contributions and layoffs.
Far too many workers have learned the hard way that a 401(k) is not the answer to long-term economic security. Such plans are more costly to administer and place all the risk on the shoulders of workers. After decades of hard work and deferred wages, retirement security should not be imperiled by the wild fluctuations of Wall Street.
I don't doubt the ability of working men and women to decide how to successfully invest their retirement savings. As we know, even the wealthiest employ a stable of bankers, accountants and consultants to manage their retirement accounts. But now with a 401(k), people of limited means would be forced to pay for those same financial advisers in the hopes of sustaining their income through retirement. They'll have to add that burden to the cost of rent, utilities, and prescriptions.
Some say the new system would affect only those not yet hired, so we therefore shouldn't care. But we are talking about the next generation of the workforce -- our children and grandchildren -- so we have an obligation to care.
Unfortunately, a financially secure retirement is slipping away from the American worker. According to the National Retirement Risk Index, a project of the Center for Retirement Research at Boston College, over half of American workers are at risk of not being able to maintain their standard of living in retirement. This retirement insecurity comes at a time when the number of people with pensions has declined, particularly in the private sector, with 401(k)s becoming many workers' sole retirement savings vehicle. But 401(k)s alone are not enough. According to Fidelity, the average 401(k) balance is less than $75,000. Even if you ignore the taxes that will be paid upon withdrawal, if you needed $15,000 per year in addition to Social Security just to scrape by in retirement, you would outlive your income after only five years.
Yet, although data from multiple sources indicate that 401(k)s are inadequate, their stranglehold continues in the private sector -- and that dominance is used as the rationale for reducing public sector pensions. It's as if the race to the bottom is unavoidable and appropriate.
It's not. We can and should aspire to improve the economic security of all workers -- public sector and private sector. What our state really needs is jobs -- let's not lose sight of that priority. Adding yet another pension tier is simply a distraction.