Battle lines have been drawn on public pension reform in New York and some of the fiercest public employee union attacks are focusing on Gov. Andrew Cuomo’s proposal to let future government employees choose between a traditional pension and a defined-contribution retirement savings plan.
The outcome of this civil war between a popular Democratic governor and powerful unions in a deep blue state could have national implications.
For anyone who follows the public pension reform saga around the country, the underlying issues in New York will be familiar. The cost of the Empire State’s traditional defined-benefit pension system has been skyrocketing — even while accounting rules obscure the full extent of the financial risks borne by taxpayers who guarantee pension benefits.
Portable defined-contribution plans, such as the 401(k)s that are now the norm in the private sector, have the virtue of creating no long-term liability for taxpayers, while giving greater career flexibility to employees.
Cuomo’s union adversaries and their allies, such as state Comptroller Thomas DiNapoli, claim that “replacing defined benefit pensions with 401(k)s will put workers’ retirement security in danger.”
In fact, all 401(k)s are not alike. For that matter, all defined-contributions plans are not 401(k)s — any more than all cars are Chryslers.
But the real model for the governor’s proposal is a defined-contribution option established nearly 50 years ago by the sprawling State University of New York system.
Over 21,000 SUNY employees, including nearly three-quarters of the faculty, have personal accounts managed by private firms over a standard pension.
The same sort of plan is available at the state-funded City University of New York, where defined-contribution is the preference of more than 9,000 employees, including 72 percent of faculty.
Most other states, following New York’s lead, offer similar options to employees of their public university systems.
Unlike a typical 401(k), the SUNY and CUNY plans are focused on annuity contracts, which are designed to provide a lifetime stream of retirement income to those who want and need it.
Annuities protect against the risk that retirees will outlive their savings — a key shortcoming of many 401(k) plans, which are focused primarily on investment returns during the accumulation stage. That’s why the Obama administration has been seeking to encourage use of annuities in such plans.
Even in a tough economy, after a rough period for the stock market, long-serving SUNY and CUNY professors are approaching retirement age with an average of close to a $1 million in their accounts with the Teachers Insurance and Annuity Association — College Retirement Equities Fund, according to data in a new study by the Manhattan Institute’s Empire Center.
University employees in their late 50s, who won’t retire until up to a decade from now, have saved enough to replace 50 to 70 percent of their incomes in retirement, depending on future investment returns.
Investment gains aside, of course, the key to adequate retirement is the amount saved in the first place. In this respect, Cuomo’s proposal is far short of ideal — requiring a minimum employer contribution of just 4 percent with no required contribution from employees.
A better plan would require savings of 12 percent of salary, with employees contributing up to half the total. By adapting the higher-education plan to a broad cross section of government employees, Cuomo could create a model for all states.
The ultimate sticking point in this fight, in New York and across the country, is union opposition to letting workers choose the kind of retirement plan that best suits their needs.
As Cuomo said when he unveiled his reform proposal last month, “Why wouldn’t you want to give the person the option?” Why, indeed?
Edmund J. McMahon is a senior fellow at the Manhattan Institute and its Albany-based Empire Center for New York State Policy.