Some Thoughts On Gov. Cuomo’s Tier VI Plan

Some Thoughts On Gov. Cuomo’s Tier VI Plan 

Published as: Defined Benefit Plans No Longer Sustainable

Governor Cuomo’s proposal to create a Tier VI 401k-syle retirement plan should not be rejected out of hand without a more robust examination of its merits and flaws, and against the backdrop of the solvency of current retirement schemes.

Defined benefit plans (DB) are retirement programs that typically are funded solely by the employer in the private sector and by taxpayers in the public sector.  The employee spends 30-40 years at a company, gets a gold watch at retirement, and can look forward to consistently receiving his retirement checks for the rest of his life.  

There are some flaws inherent to all defined pension funds that need to be addressed, whether they are government or private employer funded. 

  1. Employees assume that there will always be corporate or taxpayer money to put into their DB.  National defined benefit plans such as Social Security and Medicare were improved on the assumption that the employment levels and business prosperity that sustained such funding through payroll taxes would continue unabated.  They have not.
  2. DBs assume that we live in a static society where everything remains the same and is predictable.  Clearly, we do not.  Our society is dynamic, expanding and contracting constantly and DBs cannot keep up with the changes.  Ford, Chrysler & GM were supposed to remain as large as they were and be able to continue to support benefit plans for hundreds of thousands of retirees.  After its recent near-death experiences, it became clear that it could no longer afford to fund this plan. Changes had to be made, painful as they were.
  3. States such as New York describe their retirement plans on the assumption that its tax base would either remain the same or increase predictably, thus providing sufficient funds for DB payouts for its loyal and hard working employees.  It has not.  Governor Cuomo has a dilemma.  Reduce benefit payouts to retirees (current and future) or raise taxes to continue to fund DBs as negotiated. Raising taxes presents its own set of concerns that must be addressed.  Taxes are always a significant factor when companies consider their cost of doing business in New York or any other state. 
  4. While defined benefit plans were very common for most of the 20th Century, the percentage of employees who were able to collect on this retirement program dropped dramatically as society became more mobile.   Employees switched jobs and careers more often, and companies were forced by competition to re-think and modify their business plans – or go out of business (see Borders).

Defined contribution retirement programs such as the 401(k), exist partially in recognition of the changing nature of our demographics, business employment, and retirement concepts in the US, e.g.  

  • The  migration of jobs from one community, state or nation to another with resulting job upheavals, thus appreciably  negating the ‘one career-one employer’ concept;
  • The lower ratio of working employees to retirees.  There are fewer working people supporting DB retirement programs, thus making it difficult to insure that there is enough money available to pay its obligations when they are due, no matter what the scheme.
  • 401k’s are portable and permit a degree of employee risk control over their investment options.  The goal, of course, is to insure that enough money is available through the program to insure a steady stream of income for our longer retirement years.

All of this conspires to deprive the employees of, or reduce the opportunity to participate in, a decent long-term retirement program that they could count on. As employers leave New York, the tax burden of funding such plans becomes unacceptable, particularly when new job creation initiatives do not produce sufficient replacement tax income.  Thus our dilemma.

Defined contribution plans provide a viable, albeit imperfect, option to employees who can no longer count on being at one company for his or her entire career.  A key selling point is that they are portable retirement programs. If you left one company for any reason, you could carry your retirement portfolio with you to your next employer or other authorized retirement investment scheme.  

Governor’s Cuomo’s decision to promote an option such as  Tier 6 is an appropriate attempt to address a serious financial obligation problem that is vexing not only New Yorkers, but every other state whose pension programs are in serious financial jeopardy.

This plan may not be the best that there is, and may die a deserved death.  But until our elected officials come up with a better plan – and show the statistical projections – when we get ready to retire and get our promised retirement checks, don’t be surprised if it is not what you expected.   It is too important of an issue to let partisan politics govern rational decision making.    

Schenectady (NY) Gazette -  April 1, 2012

 

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