Saturday, February 25, 2012

Tier VI?

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Some people in our fair state, including Governor Cuomo, appear to be viewing a new pension tier as a step in alleviating the current budget crisis.  To aid in an analysis of pension costs in New York, it helps to be aware of how the pension is funded. As reported by the New York State Teachers' Retirement System (see this) the employer contribution rates over the past 28 years have varied from a high of 23.49% of salary to a low of 0.36% of salary. Here is a graph showing the years 1974-1975 through 2010-2011.

What many people do not realize is that during the years when this contribution rate was dropping, what seemed like "free money" appeared to district negotiators, and the result was a span of time when contract settlements were good from the teacher's perspective. Teacher's received good wage settlements, and the districts could make it happen without raising taxes. In essence, the districts agreed to pay the teachers more because the cost of paying the teachers was dropping. In addition, over this span of time the NYSTRS shifted from Tier I to Tier V, resulting in a less lucrative retirement options, Tier I having been the "gold mine." Later tiers also included mandatory employee contributions to the system. I, for one, was paying 3% of my salary at the time my employer was paying 0.36%.

During this time New York initiated several retirement incentives, acknowledging that one way to lessen costs was to jettison the older employees who, on average, were also the most highly paid. A major impact of these incentives was that they encouraged people to shift from the "public pool" of salary income to the "pension pool" of retirement income.  Those people, with the higher incomes, also had the higher pensions, and by retiring a bit early would tend to be on the pension payroll a bit longer.  What the state actually did was shift the burden to the retirement system.
I hope to expand on these comments in the coming days, but in the meantime I encourage all New Yorkers to seriously analyze a new Tier VI. Especially since every change that has been made over the years was made to "solve" funding problems. I guess, as that saying goes, a good solution is sometimes just in need of the right problem.

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