Defusing the Pension Bomb: How to Curb Public Retirement Costs in New York State

Publication Date: October 2003

Publisher: Manhattan Institute for Policy Research. Center for Civic Innovation

Author(s): E. J. McMahon; Peter Ferrara

Research Area: Economics; Government; Population and demographics

Keywords: public retirement costs; pension plans; defined benefit; defined contribution

Type: Report

Coverage: New York

Abstract:

Skyrocketing employee pension costs have been a major factor in the fiscal crisis affecting every level of government in New York State. The defined benefit (DB) pension plans used by governments guarantee employees a fixed percentage of retirement income based on their peak salaries and career longevity. This requires those governments to invest money each year to cover future pension payments. As a result, the DB system is crisis prone because earnings during bull markets cover employer contributions, while losses during bear markets force governments to drastically increase contributions. This study shows how greater fairness for taxpayers and better retirement benefits for most government employees can be achieved by switching from the current DB pension plan to the defined contribution (DC) model used by the vast majority of private companies.