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March 15, 2012


First glance at Tier 6, with water added

E.J. McMahon

The agreed-upon Tier 6 bill restores much of the benefit reduction originally proposed by Governor Cuomo–especially for career employees. The projected reduction in the cost of pensions, measured in terms of a hypothetical “long-term expected” employer rate, is about one-third less than Cuomo originally proposed, and the net change in the projected employer rate is a reduction of about one-third below the Tier 5 level. The reduction can be attributed mainly to the increase in employee contributions for future workers, rather than to benefit reductions. And it will take years to make a noticeable difference in tax-funded pension contributions–which will continue rising over the next few years, at a minimum.

Under Tiers 4 and 5, the maximum benefit for general employees with 40 years of service is 77 75 percent of final average salary (FAS) — the second highest of any state. Cuomo’s original Tier 6 proposal would have reduced the 40-year benefit to 65 percent of FAS, still high enough to rank in sixth place.

The agreed-upon bill allows a benefit of 75 percent of FAS for 40 years of service, which would leave the career pension in second place among all states (and highest of any state whose public employees are in the Social Security system).  In addition, the retirement age is lifted slightly, from 62 to 63 — which is still four years earlier than the full Social Security eligibility age for the cohort of workers born after 1959.

In fact, the bill slightly increases benefits over Tier 5 amounts for employees with between 20 and 25 years of service. Under Tier 5, their pensions are a flat 1.67 percent of salary per year of service, or just over 40 percent of final average salary for an employee with 24 years. Under Tier 6, the multiplier is 1.75 percent for the first 20 years of service, increasing to 2 percent for service in excess of 20 years.  This will boost the pension of the 25-year employee to 41.4 percent.  For an employee with a final average salary of $50,000, the difference can equate to an added pension of $8,000 a year.

There are, of course, two other key differences that further reduce the net present value of the pension benefit compared to those offered in previous tiers. Before retiring, employees will have to contribute more to the pension — up to 6 percent, if their salaries exceed $100,000 a year.  In addition, the FAS calculation will be based on the five consecutive peak salary years, instead of the three-year period used under current law.  This will reduce the pension to some extent, depending on the extent of wage increases received during that period.  Then there’s this anti-spiking provision: “Salary in excess of ten percent over the average of the four previous years would not be included in the final average salary.”  Under Tier 5, the anti-spike cap was a much more liberal 20 percent over the preceding two-year average.  Cuomo’s original Tier 6 would have capped the FAS more tightly, at 8 percent of the average for the previous four years.

Cuomo’s original Tier 6 bill would have completely eliminated overtime from the “pensionable” salary base for all employees.  That provision was dropped from the final bill, which only adds severance pay to the existing exclusion.  It retains the existing Tier 5 caps on overtime: $15,000 (indexed to rise with inflation) for general employees, and 15 percent for police and firefighters outside New York City.  (Cuomo’s news release described the 15 percent cap as if it was new.)

All savings imputed to the bill assume the employee contribution rates in Tier 6 will never be reduced, and that the benefit levels will never be increased.  History suggests this is a generously optimistic assumption.

More to follow, and some details of …

Filed under: Public Pensions, Uncategorized

4 Comments »

  1. Great. Employees will have to work longer, at a higher rate of pay before retiring. That should off set any savings in employer contribution rate. And think about the productivity benefits of keeping folks of retirement age on the payroll longer.

    This should prevent any local governments or school districts from offering early retirement incentives to save money.

    Another great plan from Albany to help local governments.

    Comment by Garondah — March 15, 2012 @ 12:29 pm

  2. Absolute wrong path to follow…Teachers as well as ALL NY State retirement programs require the employee to only pay into the retirement program for the FIRST TEN YEARS ONLY. They work 30+ years but only have to pay into it for 10. What a sweet deal. Every other retirement plan; Federal, private etc, you pay into your plan right up until you retire. You work 35 years…you pay into it for 35 years. Correct this and the taxpayers win all the way. Oh wait…one more item…Retirement is calculated on your contract salary. No overtime to beef it up in the last 3 years. Most of those folks never worked 5 minutes of overtime their whole careers. Get ready to retire? Sign up for all of it. This is not rocket science folks!!! Just common sense

    Comment by Randy — March 17, 2012 @ 10:24 am

  3. Guess that’s why the employee union isn’t screaming bloody murder with every state employee camped out on the steps. There’s really not much of a difference and in some cases it’s better. Leave it to Cuomo to hype this as savings for the citizens.

    Comment by Sue — March 17, 2012 @ 2:35 pm

  4. A simple way to reduce pension benefits without hurting new yorkers, is to make the COLA
    only applicable to new workers, doing nothing will solve the problem too, there is a very limited cola in the pension system, only the first $18,000 and only 1/2 of inflation, and if inflation exceeds 6% tough luck, inflation is almost always above 1% minimum, too, and the $18,000 has not been inflation adjusted in 12 years, so it used to be $24,000.

    In other words in the last 12 years, pensions paid to workers declined at least 10-20%,
    and up to 30% if bigger. This is a fact omitted, but to the empire center’s credit , many states do have fat pensions, in which legislatures can make promises, and taxpayers foot the bill, if there needs to be a 2/3 vote or a voting referendum to change the constitution, why allow a simple legislature to spend money on the taxpayer dime for decades for the next generation, if there is an increase in spending , we can cut it
    less library hours, more efficient schools, etc in the next session but not pensions, makes no sense, it’s like a permanent tax increase by a simple majority.

    Other states generally have generous colas compared to new york, so I agree with the empire center in many instances, its just that the argument may not apply to new york because of inflation, still not convinced?, What was inflation from 1975 (lindsay)?

    Comment by factchecker — October 12, 2012 @ 7:25 am

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