Mayor Bloomberg wants to rein in benefits for new New York City employees. Can his plan be adopted?

Reducing pension benefits for New York’s next generation of municipal workers, as Mayor Bloomberg proposed last week, would gradually move pension costs to a lower plateau in the coming decades. And despite the union caterwauling that greeted Mr. Bloomberg’s plan, city employees would continue to receive pensions far more generous than those available to private-sector workers.

An important caveat: much of the projected savings will vanish if municipal unions successfully push to restore the benefits before anyone in the new “tier” ever gets close to retiring. That’s what happened after previous “pension reforms” on the city and state level.

Mr. Bloomberg thinks he can guard against union claw-backs by making pension benefits a subject of local collective bargaining, which is now prohibited under state law. Yet past side deals between mayors and city unions produced some of the most costly aspects of current pension system — such as the $12,000 annual pension supplement for police and firefighters. (The elimination of this perk is the one change sought by the mayor that would slash benefits for current as well as future retirees, yielding significant immediate savings for the city.)

But the mayor has been unable to collectively bargain any reductions in health insurance costs. What makes him think he, or his successors, will be any more successful when it comes to pensions? If anything, directly negotiating retirement benefits with unions could make matters worse in the long run. Future mayors will find it enormously tempting to trade short-term savings for pension sweeteners that seem inexpensive in the short run, only to produce ballooning costs in the long run.

Mr. Bloomberg’s plan also would fail to address the fundamental flaws of the traditional defined-benefit pension system. Lenient accounting standards have allowed public pension systems across the country to build up enormous unfunded liabilities, based on unrealistic assumptions about future investment returns. Using more conservative assumptions, the city actuary estimated the unfunded liability for city pensions was $76 billion in mid-2008.

The mayor could begin to reduce financial risk and uncertainty for taxpayers by shifting more employees to a defined-contribution plan, such as the 401(k) accounts prevalent in the private sector, or to a hybrid of defined-contribution and defined-benefit system. But Mr. Bloomberg inexplicably has been unwilling to float a defined-contribution plan as a primary retirement benefit option for any category of employees.

Mr. Bloomberg may ultimately win state approval of some pension changes, such as a higher retirement age, larger employee contributions and curbs on overtime “spiking.” But this will all be more of a bandage than a cure.

Read article at Manhattan Institute