An alert reader has provided the answer to a question posed on this blog yesterday: how or where did the state’s largest public employee union come up with its estimate that Governor Cuomo’s proposed Tier 6 pension plan will “reduce benefits” by 40 percent?
It turns out that the source of the number is this January analysis by AFSCME, the national parent union of the state CSEA. We are duly chastened to admit we had not seen it before. (There’s no byline on the document, but the Microsoft Word “properties” tab indicates the author was Steven Kreisberg, AFSCME’s national director of collective bargaining. It doesn’t seem to have been posted online, either, so we’ve done it ourselves.)
Tier 6 would reduce the annual benefit by 17 percent, from 60 percent to 50 percent of final average salary for a 30-year member of the New York State Employee Retirement System, or NYSERS, but as a union-oriented blog commenter here suggested yesterday, the higher estimate of its impact has to do mainly with the retirement age. Tier 5 allows retirement with full benefits at 62, with the possibility of retirement with reduced benefits as early as 55, while the Tier 6 plan would raise the age to 65 with no early retirement option. This change alone, the AFSCME paper says, will “decrease the actuarial annuitized value of the pension benefit by 20%.” The remaining three percentage points is attributed to the redefinition of “final average salary” to include a longer period, a lower earnings cap, and the exclusion of overtime and other extras from the base, and the increase in the vesting period from 10 to 12 years.
Here’s the summary table of how AFSCME values the “interactive effect” of Tier 6 changes compared to Tier 5:
So, is this a valid way of looking at things? Without getting into mathematical details, it depends on perspective. On the one hand, an employee who works for three years longer will still be collecting a salary, including any raises in base pay, which will all add to considerably more than his or her pension. On the other hand, some individuals will attach greater value to retirement than to working, even though their income will be lower. At the end of the day, early retirement–especially for a generation whose Social Security retirement age will be 67— is a valuable benefit. That’s why the state and local governments would save a lot of money by eliminating it.
It is interesting to see AFSCME using the concept of “actuarial annuitized value” in this context. When the debate focuses on comparing the average total compensation of private vs. public workers, unions prefer to value pensions solely in terms of required contributions based on high discount rates—a measure that understates the value of risk-free pensions and thus make public-sector compensation look lower than it is.
But AFSCME and its affiliates and other defenders of the status quo haven’t been content to generally observe that a higher retirement age would equate to a less valuable pension than Tier 5 for future workers. They have been trying to make New Yorkers and their legislators think that the pension check itself will ultimately be 40 percent lower. Consider this passage from the very end of the AFCSME paper:
The benefits provided under the various systems are not overly generous. The average pension benefit paid to NYSERS retirees is slightly more than $19,151 per year. Governor Cuomo’s proposal would unjustifiably reduce those pensions by approximately 40%.
This clearly implies that what is now a $19,151 benefit will be reduced 40 percent, to $11,490, which is simply untrue. (Indeed, scanned quickly, it also implies that benefits will be reduced for current workers.)
Speaking of untruths, that oft-cited $19,151 figure is itself greatly misleading as an indication of pension generosity. It includes payments to everyone who has ever qualified for a New York state and local pension, including individuals who barely vested decades ago, as well as disability benefits and reduced payments to surviving spouses.
The real focus of the Tier 6 debate, including radio commercials sponsored by unions, has been the level of pension benefits paid to career government workers. And those benefits—absolutely guaranteed by the Constitution—are generous by any standard.
For the record, as of 2011, the average service retirement benefit for newly retired career NYSERS employees (those who retired in fiscal 2011 after at least 35 years of service) was $55,858, according to the retirement system’s 2011 financial report. On average, this represented over 70 percent of final average salary, including overtime and extras. Once they reach Social Security age, many of these employees will have higher incomes than they did before retiring.
By the way, the AFSCME also lays out some of the usual arguments against a defined-contribution option — e.g., 401(k)s are inadequate, people can’t possibly retire on them with adequate incomes, etc. For a rebuttal and an explanation of the state’s existing model of a defined-contribution plan, see our recent “Optimal Option” report.