Gov. Cuomo's Pension Reform Proposals Risk Greater Retirement Insecurity

When it comes to retirement savings, the last thing you want is too much risk -- yet Governor Cuomo's proposed reforms to New York state employee retirement plans will likely encourage more workers to place their savings in unpredictable and unreliable 401(k)'s.

Earlier this week, Gov. Cuomo stepped up his efforts to push for pension reform, including a call for all new state workers to choose between a public pension with scaled-down benefits or a 401(k) option. While it may seem right to give workers the freedom to select how to save for their retirement, there is simply no reason to make this an "either-or" decision in the first place: it's perfectly fine for workers to have access to an individualized account, but this should be in addition to the guaranteed lifetime benefits provided by a pension.

As I've documented in The Failure of the 401(k): How Individual Retirement Plans are a Costly Gamble for American Workers, the national shift to 401(k)s as the dominant method of saving for retirement has exposed many Americans to serious financial insecurity during their later years -- unlike a guaranteed pension, 401(k)'s come with the risk of outliving retirement savings or losing them in a turbulent market, increased exposure to excessively high fees, and vulnerability to losses from due to poor investment decisions.

As the sole basis for a worker's retirements savings, 401(k)'s just don't cut it (for an example of what will, see our proposal for Guaranteed Retirement Accounts). But by forcing workers at the beginning of their career to choose between a pension and a 401(k), past experience suggests that many will be tempted to roll the dice with a 401(k) rather than accepting the trimmed-down pension benefits that Cuomo proposes.

If we set the 401(k) issue to one side, however, Cuomo's proposed cuts to pension benefits do seem reasonable given the realities of the labor market today. For example, he proposes raising the retirement age from 62 to 65, but exempts workers in physically-intensive jobs like police and firefighters. He would lower the benefit cap to 50 percent of salary rather than 60 percent, bringing New York State pensions closer in line with similar states like New Jersey and Illinois. And while he boosts the annual pension multiplier to 1.67 percent, he does suggest increasing the vesting period from 10 to 12 years, meaning that it will take workers longer to earn the full value of their pension.

Public pensions have become enormously expensive to administer, and I'm fully sympathetic to those suggesting responsible cuts that will ensure the continued existence of these guaranteed savings for future generations of workers. But the key term here is "responsible," and 401(k)'s have been proven to be risk, irresponsible alternatives for retirement savings.