NYC Pension Funds are Cost-Effective: Report 

By Joan Gralla, Reuters

October 20, 2011

Traditional pension plans provide a "better bang for the buck" for New York City public employees, paying the same retirement benefits as those used in the private sector but at a significantly lower cost, according to a report issued by the comptroller on Thursday.

Some of the cost savings enjoyed by public pensions stem from their investment expertise and their leverage as institutional investors, the report said.

The study's assumption that benefits can remain the same, and costs lower, with pension plans contrasts with arguments of many local and state governments considering a move to so-called defined contribution plans on grounds they will save money.

U.S. cities and states are weighing the move in response to recession-caused budget crunches and an estimated total shortfall in public pensions ranging from around $700 billion to $3 trillion. The estimates assume differing forecasts of investment returns, which can be volatile.

"Defined benefit plans have enormous economic efficiencies over defined contribution plans," said the report by the National Institute on Retirement Security for New York City Comptroller John Liu, a contender for the Democratic mayoral nomination.

The findings could buoy his standing with unionized workers.

Defined contribution or thrift plans are typically less generous than pension plans. That is why many private employers over the past decades have switched to 401(k) plans and the like, which do not promise to pay a set benefit for life.

Workers often prefer the security of pensions and clashes over benefits have arisen in both the public and private sectors, as seen in Wisconsin, and in the strike by Verizon workers.

The report said that pooling the amount of money needed to pay all the retirees' pension benefits allows plans to only fund for the average life expectancy.

In contrast, workers with defined contribution plans must save enough for their maximum life expectancy. Defined contribution plans, such as 401(k) or thrift plans, pay employees the total sum contributed by the worker and employer plus any investment gains. There is no guaranteed benefit and workers bear all the risk that the investments they select -- instead of experienced fund managers -- will lose money.

The report found that for a city teacher retiring at age 62, a pension fund should have accumulated $607,946 to pay benefits, but a defined contribution plan would have to have $825,917 to cover those additional costs.

For police officers and firefighters, the city would have to collect more than $1 million at retirement age in defined contribution plans but less than $780,000 in pensions. Those workers tend to retire earlier, in their fifties.

"Defined benefit plans present a rare 'win-win' approach by providing economic security in retirement in the most cost-effective manner," the report found.

Pensions can cost more than one-third less than plans such as 401(k)s used in the private sector, the study said.

Most states and cities have constitutional requirements to provide their employees with a basic level of retirement benefits. Or the benefits may be part of a collective bargaining contract. Once promised, the benefits almost always cannot be lowered.

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