This year, New York City taxpayers will fork over $8.4 billion for city workers’ pensions, up from $1.3 billion a decade ago. City pension costs are a crisis — one that the city’s fiscal watchdog, John Liu, should tackle. Instead, Comptroller Liu just released a report whose title might as well be “Nothing to See Here, Folks — Just Leave Your Wallet and Move Along.”
The real title is “A Better Bang for NYC’s Buck.” In it, Liu’s researchers argue that New York’s pension plans, which allow uniformed workers to retire after just 20 years with a hefty guaranteed income for life, are a terrific deal for taxpayers.
New York’s pension plans “deliver the same retirement income at nearly 40 percent lower cost” than corporate-style 401(k)s would, Liu says. They’re “the most cost-efficient vehicle to deliver retirement-income security.”
Eyeing a mayoral run someday, the comptroller wants his union supporters to get the point: There won’t be any calls for pension reform from his corner.
But the details of the report point up the need for reform.
The true but irrelevant point that the report talks up is this: Huge retirement plans like New York’s, which manage $110 billion for 700,000 families’ current or future retirement, can achieve economies of scale and other cost savings (e.g., lower investment fees) because of their sheer size.
But this is not a brilliant insight. If I buy a million eggs, I’ll pay less per egg than if I buy a dozen. That doesn’t answer the question of how many eggs I need or who should pay for them.
So, fine: The report proudly notes that “for any given level of benefit,” a traditional pension plan will cost less than a private-style 401(k) plan, which offers no taxpayer guarantee. But that tells you nothing about whether New York needs to offer today’s “given level” of benefits — or whether taxpayers can afford it, as pension costs suck up 20 percent of tax dollars.
Liu’s researchers find, for example, that in the private sector, a person who wanted to retire at age 51 on a $43,515 annual pension would have to rack up a $1.1 million nest egg. In the public sector, a police officer who retires at that age needs $769,299 — a 28 percent savings.
But the city taxpayer would save even more if the officer had to work five years longer, if he had to contribute more to his own pension or if the pension didn’t include goodies like overtime, which drive up costs. Over time, the savings from such would be hundreds of millions, even billions, each year.
Liu also claims that public-pension funds are a better deal because they can take much more risk in pursuit of higher profits. But he all but ignores the fact that when pension returns fall short, it’s the taxpayer who must make up the difference.
Skyrocketing pension costs have wreaked havoc with the city’s budget; they’re the driving force behind budget cuts, including fewer police officers to deal with more protests and gunplay alike. Yet Liu’s report merely says that concerns about higher taxpayer costs are “legitimate” — and that’s it.
Indeed, the report raises a question that the comptroller surely didn’t intend: If big pension plans offer better returns at lower costs, why not let city workers participate in such plans if they like — but with only a small portion (maybe 20 percent of salary, instead of 50 percent) guaranteed by the taxpayers?
Workers who want more money could contribute more and still benefit from scale. But the extra contributions wouldn’t carry a taxpayer guarantee.
Anyway, New York City doesn’t have to guarantee such generous pensions to “work” its size. It could still use the leverage to fight for lower fees on 401(k)-style plans for its workforce.
Liu’s report doesn’t advance the cause of fixing pensions. But it does remind New Yorkers of the stakes of the next mayoral race. It should remind them, too, that the current mayor is running out of time.
If Mayor Bloomberg doesn’t get something done on pensions — and soon — he’ll leave behind a legacy of having left untouched a status quo whose costs are eating the city from the inside out. Sadly, plenty of his would-be successors think that’s just fine.
Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.