Another Example of Poor Policy

Anyone who has ever read one of the KCS blog posts knows that we are big fans of defined benefit plans for the masses, both private and public employees. We fear the negative implications of our failure to preserve and protect these valuable benefits given that the alternative is to have untrained individuals become portfolio managers responsible for their retirement. Nuts!

However, a recent excellent report by Jonathan Trichter, a candidate for NY State Comptroller, suggests that new employees in defined benefit plans are getting short-changed relative to those employees who have greater tenure because of the tiering of benefits that have occurred. We agree. In fact, the NY State Employees Retirement System (ERS) currently has 6 different tiers and one’s benefits are determined by the start date.

We believe that employees doing the same job should receive the same benefits, and it shouldn’t matter how long they have been in that position. According to Trichter, longer-tenured State and local workers in NYSLRS will have about 60%-100% of their benefit financed through employer contributions. For younger employees that percentage falls to about 20%.

It gets worse, as roughly 70% of newer employees will never receive one dollar in employer-financed benefits. Furthermore, about 2/3rds of workers hired at 25-years-old would be better off cashing out their contributions than receiving a pension at a later date.

Trichter’s report proposes several solutions. As we stated above, we aren’t huge fans of DC alternatives but given the math above, it doesn’t make sense for younger employees in multi-tiered pension systems to fund someone else’s pension without the benefit of one for themselves. We think that Jonathan Trichter’s report/analysis is worth your investment of time.

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