New York City’s defined-benefit pension plans can deliver the same retirement income at a nearly 40% lower cost than a 401(k)-type individual account, according to a report.
The National Institute on Retirement Security, a Washington-based think tank, joined with consulting group Pension Trustee Advisors to conduct the study on behalf of city Comptroller John Liu.
The report, “A Better Bang for New York City’s Buck,” said defined benefit savings come from superior investment returns, better management of longevity risk, and portfolio diversification.
“As hard as things are for people who are in public pension plans, it’s way worse for individuals in DC [defined contribution] accounts,” the author of the report, Pension Trustee Advisors president William Fornia, said Friday. “DB [defined benefit] plans are a more efficient use of taxpayer funds when offering retirement benefits to state and local government employees.”
Many states are considering replacing defined pension plans with a 401(k)-type plans. Rhode Island’s General Assembly late last week was considering a proposal from Gov. Lincoln Chafee and General Treasurer Gina Raimondo for a hybrid system that would merge defined pensions with 401(k). In Wisconsin, large protests broke out in capital city Madison when Gov. Scott Walker forced public workers to pay more for their pensions.
“Calls to replace pension plans with 401(k) plans understandably increase when markets have returned poorly over sustained periods. However, as this and other studies show, the defined pension is the most cost-efficient vehicle to deliver retirement income security,” said Liu, an expected candidate for mayor and former City Council member whom public unions have traditionally supported.
According to the report, the model for the research was based on 1,000 newly hired employees from each of the city’s five primary pension plans: the New York City Employees’ Retirement System. the Teachers’ Retirement System of the City of New York. the New York City Police Pension Fund Subchapter 2. the New York City Fire Department Pension Fund, and the New York City Board of Education Retirement System.
The city’s general obligation bonds have a double-A ratings from all three major rating agencies.