A new “tier” with more teeth

by E.J. McMahon |  | NY Torch

This just in: Governor Cuomo’s 2012-13 Executive Budget has been posted online, and it does, indeed, include a 401(1)k-style defined-contribution (DC) retirement plan option.

Last year, the Governor proposed a “Tier 6″ pension plan that simply made adjustments to the existing defined-benefit (DB) pension system — raising retirement ages, extending the vesting period, boosting employee contributions, curbing use of overtime to pad pensions.

Today’s proposal is a big improvement.

On the DB side of the ledger, a key modification to the original proposal is a ” variable ‘risk/reward’ system under which employee contributions would decrease or increase, within limits, tied to economic conditions.” In addition, the new DB system would feature staggered schedule of employee contributions, ranging from 3 percent to 6 percent depending on salary level, with higher salaries paying more.

The “voluntary” 401(1)k-style plan would include a minimum employer contribution of 4 percent, which could increase to a maximum of 7 percent if the employee matches with a 3 percent contribution, bringing potential annual retirement savings to 11 10 percent. This, the Budget Message notes, would “offer a portability and (early) vesting feature not available with defined-benefit options.”

More details are to be found in Part H of this bill. Or, if you prefer, the bill memo.

Suffice to say, it’s a very big deal that Cuomo has put the DC concept on the table.  The new “risk-reward” component of his DB reform is also noteworthy, because it gets at the heart of the problem — the one-sided assumption of financial risk by taxpayers.

- E.J. McMahon is the President at the Empire Center for Public Policy.