City Comptroller John Liu was asked at a Crain’s NY Breakfast last week whether he would favor shifting future municipal employees from a defined-benefit pension system to a 401(k)-style defined-contribution system.  His reply, according to Crain’s Insider:

“There’s no difference between the cost of benefits, whether they’re defined benefits or defined contributions. There is a difference in who bears the risk,” Liu says. “In defined benefits, the government bears the risks but also enjoys the fruits [if returns are robust]. For defined contribution plans, it’s the participant who bears the risk. To provide the same level of benefits in the long term, it’s cheaper for a large sponsor to pay because of economies of scale and because a large sponsor can ride out fluctuations in the markets.”

Liu says the current system, which pools risk, is more cost-effective than having individuals bear risk. It is more efficient for one investor to manage $1 billion than for 10,000 investors to manage $100,000 each. In any case, he says, “The idea of getting rid of the risk for municipalities and shifting it to retirees is silly.”

“Silly”?  The city’s pension fund contribution for fiscal 2011 is now projected at $7 billion—more than 10 percent of the entire budget, and a sevenfold increase since 2001; this directly reflects the cost to taxpayers of “riding out the fluctuations in the market” on behalf of employees who can retire early with generous benefits constitutionally guaranteed against diminution or impairment. The city’s five pension funds have a combined unfunded liability that one analyst has estimated at more than $100 billion.   The New York City Teacher Retirement System alone is $36 billion short of what it needs to make good on its pension promises, according to a newly issued Manhattan Institute report.

Now imagine an alternative universe in which the traditional pension plan never existed; i.e., in which all of the city’s employees were enrolled in defined-contribution plans, such as those favored by State University of New York and City University of New York faculty.  In that case, the city’s tax-funded contribution to retiree savings accounts would now be much lower, and would be rising on a predictable path tied to annual growth in payroll costs.  And the taxpayers’ long-term liability for pension benefits would be:  Zero.  Zilch.  Nada. 

It would have been one thing to argue that the traditional system is less costly for the comptroller to administer, or that it offers employees more ironclad security than a DC plan.  It wouldn’t have been surprising if Liu, a big favorite of public-sector labor unions and their political arm, had simply side-stepped the question.  But for the city comptroller, of all people, to belittle the concentrated long-term financial risk associated with the traditional pension system is simply jaw-dropping.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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