February 22, 2012
By NYS AFL-CIO President Mario Cilento
Gov. Andrew Cuomo’s Executive Budget proposes creating a new pension plan for nurses, teachers, firefighters and other workers employed by state and local governments. The new plan, Tier 6, offers new hires the choice of a rock and a hard place, forcing workers to choose between a dramatically diminished defined-benefit pension plan and a defined-contribution 401(k)-style plan. Strong defined-benefit pensions offer a reliable, predictable benefit based on a retiree’s number of years worked and salary. It allows workers to plan for the future and provides retirees with predictable income. It also pools risk for all members of the plan. Defined-contribution, 401(k)-style plans base a retiree’s benefit on how much he or she can save in an individual account.
Impact on all
Proponents of the new tier point out that the new plan would impact only new public employees, so therefore we shouldn’t care. First, that premise is disturbing. No parent has ever said, “I want my children to do worse than I did.” But that is essentially the rationale for Tier 6. Second, the “It’s O.K. because it doesn’t affect me” mentality is simply inaccurate. Tier 6 will have ramifications for all workers — be they public or private, active or retired. Current public employees are not immune from the negative impacts of Tier 6 even though its provisions may not directly apply to them. The way Tier 6 is constructed, workers would likely opt for the 401(k)-style plan because they would not be required to contribute, as opposed to the traditional pension, which requires both employee and employer contributions. Diverting new entries away from the defined-benefit plan hurts current members of the retirement system, as well as retirees and beneficiaries, by increasing risk and reducing cost-sharing benefits of collective plans.
A negative trend
Private employers that have bucked the drift toward 401(k)s will see the example set by the state as an invitation to reduce or eliminate benefits.
