Johnson, Haaga & Southgate: Understanding the Growth in Government Contributions to New York State’s Public Pension Plans

From the Introduction:

New York State has some of the best-funded public pension plans in the nation (Pew Center on the States 2012). Data from plan actuaries show that the retirement plans covering the state’s public school teachers, state and local public safety workers, and general state and local government employees held enough assets in 2013 to cover 88 percent of future pension obligations.1 However, retirement benefits for state and local government employees have become increasingly costly for New York State’s taxpayers over the past decade (State Budget Crisis Task Force 2012). Nationally, contributions by state and local governments to public employee retirement plans doubled in inflation-adjusted dollars between 2002 and 2012. In New York State, by contrast, total government contributions were more than six times higher in 2012 than 2002, the largest increase in the nation.

This surge in government contributions has created financial problems for local governments and raised questions about the sustainability of the state’s retirement plans, prompting some observers to advocate cutting retirement benefits for public employees (McMahon and Barro 2010).

The appropriate response, however, depends on why costs have been rising. Are pensions too generous (Empire Center for Public Policy 2014; McMahon 2012)? Or have costs been rising because state and local governments have contributed too little to the plan in earlier years (AFSCME 2012), forcing them to contribute more recently to make up for past shortfalls, or because risky investment strategies did not pay off? The first explanation suggests that policymakers should cut benefits, raise mandatory employee contributions, or fundamentally change the retirement plan design. The second explanations suggest that policymakers should tighten funding rules or investment policies, but not necessarily change benefits.

 

Available for download here.

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