New York Faces Public Pension Challenge Despite Good Management and Being Fully Funded

January 21, 2011

The Empire Center for New York State Policy has a public pension calculator feature on its website. Input your target retirement age, years worked, and final average salary, and find out what your pension benefit would be if you were a public employee.

Josh Barro of the Manhattan Institute explains why the problem in New York and other states isn’t just mismanagement or the collapse of the stock market, but inherent problems with public defined-benefit plans:

Take my home state of New York. We came into the recession with some of the best-funded pension plans in the country: we made our required pension contributions every year and were over 100 percent funded, if you follow the overly-rosy accounting practices that public pensions are allowed to use. Pension management practices were by most accounts appropriate, notwithstanding a pay-to-play scandal in one of the state’s pension systems.

Yet, pension contribution rates are skyrocketing and will continue to do so. By 2015, pension payments by school districts will more than quadruple from their levels in 2010, requiring a property tax increase of 18 percent just to pay for higher pension costs.[…]

The fundamental reason for the pension mess is that nearly three decades of bull markets made pensions look cheaper than they really were, and led lawmakers to hand out pensions that were unaffordable except when bolstered by lucky investment returns.[…]

It is not atypical for a full-career teacher working in a suburban district downstate to retire at 59 with a pension of nearly $80,000 per year, adjusted annually for cost of living. That pension is not subject to state and local taxes and, unlike many private-sector pensions, does not include an offset for Social Security benefits. Buying an equivalent annuity would cost you more than $1.5 million.[…]

I do think the unions are right about one thing here: we shouldn’t blame the unions for this mess. Public employee unions have done exactly what they are supposed to do: they have advocated vociferously and effectively for their members’ interests in negotiations against management. The trouble is that, when the employer is the government, all the rest of us are management.

More on New York here.


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