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March 6, 2012


Mystery solved

E.J. McMahon

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.

Filed under: Public Pensions, Uncategorized

5 Comments »

  1. Thank you for the clarification on this. Taking the time to go through this and respond in a responsible honest manner. It is appreciated to post facts to uncover any misleading information that is placed out into the public. Transparency is needed when public funding is involved. Any signs of deception should be a red flag to all taxpayers and legislatures that represent the people paying for this.

    Comment by Scott Riggi — March 6, 2012 @ 10:42 am

  2. Response to ‘Darth’:

    ‘Darth’, you recoil like a Vampire that’s just been faced with a cross, the truth seering your flesh. You are indeed right that there “is no parity”, and that’s why it is, and remains, in spite of your diversion, the central issue with the other 11 million of us.

    What was happening in the public sector when millions of private-sector jobs and careers were vaporized in the early 90’s? Life (and increases) as usual. When labor costs rose in the run-up to Y2k, professional private-sector salaries rose, and public-sector counterparts blossomed as well. But in the decade-plus thereafter, when the private sector imploded and jobs, salaries, benefits, retirements and careers vaporized by the millions, the public-sector kept right on ‘appreciating’ as if a child put it’s hands over it’s eyes and pretended that anything not acknowledged didn’t really exist. And you’re still there with the same hollow arguments, as we grow increasingly outraged at politicians (regardless from which camp) that pander to your bribes and threats and line their pockets at our expense.

    Your self-interest is anticipated, theirs a blatant mockery of our legal system and the sense of justice this Nation was founded on, and the fact that they have ‘legalized’ their conduct and accept those bribes with self-effected impunity an added twist of the knife on the State’s citizenry.

    Give your harangue to the Kodak retirees as old as 85 that just lost the employer-guaranteed healthcare they worked a lifetime for with the stroke of a pen, or the GE employees that once enjoyed what you do and now pay $5,000 a year for a family healthcare policy that includes a $5,000 deductible before it pays a dime - on top of being forced to take a 5% pay cut and seeing essentially no raises since 2008. (Of course, that isn’t an issue for the ~60,000 employees those two companies have liquidated in recent years or moved out of state.) Tell me how many still-working private sector New Yorkers you expect will ever receive a tax-free, comprehensive defined-benefit pension you still enjoy.

    Yes, ‘Darth’ it IS about parity.

    You jumped because the grass was greener and now act to preserve your own self-interest - admit it.

    Comment by Livewire — March 6, 2012 @ 5:29 pm

  3. I recoiled? Now that’s funny.

    It seems your problem Livewire is that I pointed out a fatal flaw in your argument - that there is “parity” anywhere, and because of that, the best you can do to respond is come back with a whole lot of inaccurate partisan talking points.

    I’m unimpressed.

    Comment by Darth Stateworker — March 6, 2012 @ 6:02 pm

  4. [...] how do the unions come up with that 40 percent figure?  Simple: as explained here, they assert that a proposed increase in the retirement age, from 62 to 65, would be equivalent all [...]

    Pingback by The Torch — March 7, 2012 @ 10:11 am

  5. this response by EJ McMahon is laughable …

    - McMahon chooses to eliminate every single person under the pension plan EXCEPT those that have achieved the maximum allowable pension. Give us a percentage of retirees that falls within your 35 years of service in 2011 retirements. That number will fall somewhere around 15% or less. McMahon chooses to argue that less than 15% retirees represent what 100% of them are getting paid. The numbers McMahon quotes himself exposes that THE VAST MAJORITY of pensioners never even remotely achieve the “promised land” of a maximum pension benefit that he chooses to represent as the norm.

    and Livewire, how about attacking big business and corporations along with the wealthy elite who are all ROLLING in cash even during the “Great Recession”. They continue to extort our communities under the guise of “business friendly” by demanding to pay little if ANY TAXES AT ALL. They demand this or else they will go elsewhere. THAT TAX BILL now falls directly in the laps of the residents of those communities being extorted. Corporate Welfare DWARFS ANYTHING spent on the state work force.

    Comment by ResidentX — March 7, 2012 @ 10:39 am

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