Posted by
John R. LaPlante on Thursday, October 12, 2006 4:04:54 PM
The other day we commented on the dire condition of some state’s pension programs. The Empire Center for New York State Policy offers a good look at one of the states with the sickest pension plans.
The report, “Defusing New York’s Pension Bomb,” calls for the public sector to adopt changes made by the private sector. Under the current system, which obscures costs, taxpayer contributions to the plans have increased $5.6 billion over the last 5 years.
Most governments use a defined benefit approach, in which an employee’s highest salary (usually the average of the highest-paid 3 or 5 years) is multiplied by the number of years of service. In recessions, investment returns go down—but so do tax receipts. That is, under a defined benefit plan, states must pay more money into employee plans at a time when they can least afford it.
The report calls for New York to shift employees to a defined contribution plan, in which a fixed percentage of compensation—say, 5 percent of a salary—is put aside. One benefit of the proposal: pension costs would be predictable. Another: when politicians increase the level of employee benefits, their moves will be more obvious to the public.
Why is reform required? There are many reasons, but here’s one. In recent years, New York City has implemented record tax increases. Three quarters of the increase has been dedicated to shoring up the pension plans.
While few state or local governments have problems as severe as those of New York state or New York City, the difference is usually one of size and not kind.