A popular retirement plan first authorized almost 50 years ago for employees of the State University of New York (SUNY) can be a model for a defined-contribution option that would be offered to all new state and local employees under Governor Andrew Cuomo’s Tier 6 pension reform proposal, according to a report released today by the Empire Center for Public Policy.
The report, “Optimal Option,” focuses on the difference between traditional defined-benefit pension plans and defined-contribution plans, which are increasingly prevalent in the private sector. Defined-benefit pensions offer a guaranteed stream of retirement income based on career duration and final average salary. In a defined-contribution plan, workers’ retirement incomes are determined by how much they save in personal accounts. Over 21,000 SUNY employees, including nearly three-quarters of the faculty, have opted into a defined-contribution plan offered by the university since 1964. A similar plan is available at the City University of New York (CUNY), where it has been chosen by more than 9,000 employees, including 72 percent of faculty.
E.J. McMahon, Empire Center senior fellow and lead author of the report, said defined-contribution plans offered advantages to employees who choose them.
“While workers in a defined-contribution plan assume the market risk associated with funding their own retirements, they also gain the benefits of rapid vesting, portability to different employers and greater flexibility to shape financial plans in line with personal needs and preferences,” McMahon said. “From the employer’s standpoint, defined-contribution plans have the advantage of being financially transparent and predictable, unlike defined-benefit pension plans.”
The report showed that a young worker leaving a state or local government job before reaching the “vesting” age for a Tier 5 pension could ultimately realize more than $150,000 in added retirement savings with a portable plan like SUNY’s. The report also presented data on savings accumulations by SUNY and CUNY employees in plans managed by the Teachers Insurance Annuity Association and College Retirement Equities Fund (TIAA-CREF). Even in hard economic times, long-serving SUNY and CUNY professors approaching retirement have saved enough to replace 50 to 70 percent of their incomes in retirement, depending on the future investment return outlook, the report said.
McMahon said there are significant differences between the TIAA-CREF model used in higher education and typical employer-sponsored Section 401(k) plans in the private sector.
“Critics of the defined-contribution option are making wild generalizations about 401(k) plans that simply don’t apply to the SUNY and CUNY plans,” he said. “The SUNY and CUNY plans are built on insurance annuity contracts, which deliver a stream of retirement income like a pension, in order to protect against the risk that retirees will outlive their savings.”
Adequate savings levels are one key to a successful defined contribution plan, McMahon said. The report recommends Cuomo’s defined-contribution option could be improved by raising the total contribution level to 12 percent of salary, with employees contributing the same 4 to 6 percent that would be required for the new defined-benefit plan in Tier 6.
Read and download the complete report here.