NY Comptroller disagrees with Governor about public pensions.

The details of Gov. Cuomo's proposed Tier 6 pension plan are becoming clearer. According to a recent article in NYSUT United: "Lifetime employee contributions would vary from 4 to 6 percent; state workers, including educators, would have to work 12 years to be fully vested; retirement age would be increased to 65; and pensions would be based on a five-year final average salary." In addition: "The Tier 6 proposal would reduce public employees' retirement income by calculating every year of credit at 1.67 percent — regardless of years of service."

In other words, a teacher's pension after a 35-year career would be 58% of final average salary compared with the current figure of 70%. And, since the FAS is based on 5 years, instead of the current 3 years, the pension would be a reduced percentage of a reduced FAS.

In addition, within 30 days of entering the profession a new-hire must make a irrevocable choice between the above traditional pension (defined benefit) or a new 401(k)-type defined contribution plan. Under this new plan, the employer would contribute at least 4% per year, and vesting would take place after one year.

Why should current inservice or retired teachers care about this? There's a very good reason, and we'll get to it in a bit.

First, let's talk about the NYS Comptroller, Thomas DiNapoli. The comptroller is the financial watchdog for the state. Surely he must be in favor of this proposed change. Not even a bit.

The comptroller is also the sole trustee of the retirement system which covers most state and local employees, other than teachers who have a separate--but similar--system. The systems share the same tier structure. As the sole trustee, DiNapoli is very familiar with the numbers involved in the retirement systems.

According to the Update (the publication of the New York State and Local Employees Retirement System): "Comptroller DiNapoli has supported--and will continue to support--our current system of providing a defined benefit plan for retirees."


DiNapoli is also quoted in the NYSUT United article referenced above: "401(k)s were never intended to replace pensions," DiNapoli said. "They were designed as a saving mechanism to supplement Social Security and pension income, and I think they have certainly proven inadequate to provide retirement security." A National Institute on Retirement Security study found traditional defined benefit pension plans operate at nearly half the cost of 401(k)-type plans." [Emphasis mine.]

(For details on why defined benefit pension plans are less costly to the employer, see What's so bad about 401(k) plans.)

So, why should inservice and retired teachers care about the retirement plans for new hires? The health of the fund which pays current pension benefits depends on investment income, contributions from employers and contributions from current inservice teachers. Any teacher participating in a 401(k)-style system will no longer be contributing to the common retirement fund. Their contributions will be held separately in an individual account for their sole benefit. This will weaken the ability of the common fund to provide payments to current retirees.