Do retirement incentives save money?

by Lise Bang-Jensen |  | NY Torch

Visions of sugar plums dance in the heads of older state workers–amid Albany’s $9 billion budget gap. They dream of fatter pensions should Senate approve Governor Paterson’s early retirement bill as the Assembly did this week.

Although a bonanza for aging baby boomers, the pension sweetener might cost taxpayers more than its saves. “Might” is the operative word, because the Paterson administration can’t quantify the net savings of the proposed incentive, which is similar to one offered in 2002.

The 2002 plan increased pension costs by $249 million. But eight years later, state officials don’t know if those costs were offset by savings. In fact, although the state has offered 10 pension sweeteners since 1983, state officials have never done a cost-benefit analysis of a single one. Nor has any state comptroller audited them.

Paterson’s plan, introduced last week, includes two elements. Under Part A, an employee would be eligible for an additional month of service credit for each year of service (up to 36 months) if they work in job titles specifically targeted for the benefit. Under Part B, an employee could retire with full benefits at age 55 with only 25 years of service (instead of 30).

In “Early retirement for state workers: Money-saver, or costly sweetener?,” Public Payroll Watch (print edition) examines the governor’s bill in light of previous retirement incentives (here). Here are some highlights.

  • In Executive Branch agencies, eligibility for Part A is determined by the “appointing authority”–i.e., targeted at the employer’s discretion. Positions vacated by employees claiming Part A benefits must be eliminated, but the bill doesn’t say for how long.
  •  Part B, the 55-25 plan, is not targeted, beyond the exclusion of workers considered essential to health and safety. The bill does not say Part B jobs are to be abolished.
  • Legislative and Judicial employees (except elected officials and judges) would qualify for pension sweeteners if their employers opt into the plan, but the bill language does not prohibit the refilling of vacated jobs.
  •  The fiscal note does not say how much the incentive will save–or cost. It calculates added pension costs at about 60 percent of final average salary for Part A; and 110 percent of FAS for Part B.
  • Added pension costs will be amortized–in effect, borrowed from the retirement system–over five years.
  •  Based on 2002 costs, the plan conservatively could add $325 million in pension costs.

Why do rumors of a possible retirement incentive cause state workers to delay planned retirements? The sugar plums can be irresistible. The Public Payroll Watch report documents seven examples of how the incentives would enhance pensions of retirees with a Final Average Salary (FAS) of $60,000.

Under Part A (up to 36 months of added credit), an employee with 19 years could see her pension grow from $18,924 to $24,696 a year, a net increase of $5,772, or 30.5 percent. The pension of a 27-year employee would jump from $31,400 to $35,100, an increase of $2,700 a year, or 8.3 percent.

Under Part B (“55-25”), a 55-year-old employee with 25 service years and a FAS of $60,000, would see her benefits go from $21,900 to $30,000, an increase of $8,100 a year, or 37 percent. For a 58-year-old with 25 years and a FAS of $60,000, the benefits would jump from $24,600 to $30,000, an increase of $5,400, or 22 percent.

Some sugar plums.

Originally Published: NY  Public Payroll Watch, May 26, 2010