First glance at Tier 6, with water added

by E.J. McMahon |  | NY Torch

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 7775 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.

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