What is a pension 'tier' and why are state workers opposed to a new one?

What is a pension ‘tier’ and why are state workers opposed to a new one?

Posted March 7, 2012 By Sasha Chavkin

As part of his proposed budget for FY 2012-13, Gov. Andrew Cuomo has called for significant changes to the pension program for state employees. His plan creates a new “tier” of pensions that would cut the state’s growing pension costs by reducing the benefits it provides to future employees. The proposal is known as Tier 6 because it would establish a sixth different benefit structure for future employees on top of the the 5 tiers of benefits already in place.

At the New York World, we wanted to know: What pension benefits do state workers in Tiers 1 through 5 receive? We asked Brian Curran, director of legislation and counsel for the New York State Public Employees Federation – which strongly opposes Tier 6 – to explain how the system works.

What pension plan do New York State employees belong to?

In New York, most of the employees in state government or in upstate local governments are in the state retirement system. That’s a very large pension plan, it covers about 600,000 workers.

What are the main differences among the tiers of benefits currently offered?

There are currently 5 tiers in the state pension plan. Tier 1 existed prior to 1973, so it affects anyone who was hired prior to that date. Tier 2 ended in 1976. There are very few people left in the state workforce who are in Tier 1 or Tier 2 – there’s less than 4 percent of the total workforce within those two tiers.

The main difference between Tiers 1 and 2 and the later tiers is that prior to those times employees did not have to pay anything out of their own salary into the pension plan. The cost was covered by the employer. That changed with the creation of Tier 3 in 1976. Since that time, employees who are hired are required to pay 3 percent of their salary into the pension plan. That’s true of the Tiers 3, 4 and 5.

There are some other differences in the benefits, the primary being that in Tier 1 you could retire at age 55 with a full pension. Later tiers you have to work until you’re 62, and if you retire before age 62 your pension is significantly reduced. The big difference in the plan that was adopted two years ago, Tier 5, is that prior to that time employees paid into the pension plans for the first 10 years they were working. That has now changed so that under Tier 5, people who are hired pay 3 percent into the pension funds all of their careers.

You mentioned that only about 4 percent of the workforce is in tiers 1 or 2. How does it break down for the other tiers?

For the state retirement system, roughly 91 percent are in tiers 3 and 4. About 5 percent are in Tier 5. The reason why there’s that small number in Tier 5 is that it only began two years ago.

A lot of people don’t understand the real nature of these pension benefits because attention tends to get focused on the small number of cases where someone’s getting a big pension. The average pension in the state retirement fund is $19, 151 per year, and 76 percent of the pensions are less than $30,000.

Gov. Cuomo is pushing for a Tier 6 to be created for new state employees. How would the deal for Tier 6 differ from previous tiers?

The governor’s plan changes the benefit structure in a number of ways, and when you add them all together what they amount to is that over the lifetime of a worker their pension benefit will be reduced by about 40 percent from Tier 5.

It accomplishes that in part by requiring you to work longer; you wouldn’t be able to collect your pension until you’re 65. The formula of how much you would get for each year of service is also reduced. The other big change the Governor is proposing is to significantly increase the amount that employees have to pay into the pension plan. Instead of paying 3 percent of your salary, you would pay 4 or 5 or 6 percent. For the majority of our members, they would be required to pay 6 percent of their salary. They would be doubling the amount they’re required to pay in.

Once you’re in a certain tier, is your pension set in stone?

The plan can’t change. Once you’re in particular tier, you’re guaranteed that the benefit structure will stay for that tier. More than 40 years ago, the courts ruled that it is unconstitutional to reduce an employee’s pension benefit after they’ve been hired under a particular pension plan. This is under the New York State Constitution.

What about the increasing costs from pensions faced by New York State?

The current discussion about the proposed Tier 6 and about the pension system overall is driven largely by the fact that the costs to the employer, that is to say state and local governments, have been going up significantly in the last few years. That’s a legitimate concern.

The thing that’s important for everyone to understand is that cost has not gone up because the benefits went up. The reason why the employer costs are going up is because 83 percent of the benefits coming out of the state pension system are paid not by the taxpayer or by employees putting money in; they’re paid by the pension fund investing those moneys and making a return on the investment by investing in stocks and bonds. When the stock market crashed in 2008, the pension fund like all investors experienced significant losses.

People who are advocating for Tier 6 are trying to lead people to believe that the current cost increases will go on forever. The Governor uses the term “unsustainable” to say these cost increases can’t keep going up because it will bankrupt everyone. That might be true if the cost increases were going to go on forever, but they are not. The actuaries for the state pension system, the New York City pension system, the teachers retirement system all say the same thing – these costs will peak out and decline as the economy stabilizes.

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<h1>What is a pension ‘tier’ and why are state workers opposed to a new one?</h1><a onclick="javascript:pageTracker._trackPageview('/outgoing/www.thenewyorkworld.com/wp-content/uploads/2012/01/dailyQ2-01.jpg');" href="http://www.thenewyorkworld.com/wp-content/uploads/2012/01/dailyQ2-01.jpg"><img class="alignleft size-full wp-image-2600" title="dailyQ2-01" src="http://www.thenewyorkworld.com/wp-content/uploads/2012/01/dailyQ2-01.jpg" alt="" width="105" height="105" /></a>As part of his proposed budget for FY 2012-13, Gov. Andrew Cuomo has called for significant changes to the pension program for state employees.  His plan creates a new “tier” of pensions that would cut the state’s growing pension costs by reducing the benefits it provides to future employees. The proposal is known as Tier 6 because it would establish a sixth different benefit structure for future employees on top of the the 5 tiers of benefits already in place.
At the New York World, we wanted to know: What pension benefits do state workers in Tiers 1 through 5 receive? We asked Brian Curran, director of legislation and counsel for the New York State Public Employees Federation – which strongly opposes Tier 6 – to explain how the system works. 
 
What pension plan do New York State employees belong to?
In New York, most of the employees in state government or in upstate local governments are in the state retirement system. That’s a very large pension plan, it covers about 600,000 workers.
 
What are the main differences among the tiers of benefits currently offered?
There are currently 5 tiers in the state pension plan. Tier 1 existed prior to 1973, so it affects anyone who was hired prior to that date. Tier 2 ended in 1976.  There are very few people left in the state workforce who are in Tier 1 or Tier 2 – there’s less than 4 percent of the total workforce within those two tiers.
The main difference between Tiers 1 and 2 and the later tiers is that prior to those times employees did not have to pay anything out of their own salary into the pension plan. The cost was covered by the employer. That changed with the creation of Tier 3 in 1976. Since that time, employees who are hired are required to pay 3 percent of their salary into the pension plan. That’s true of the Tiers 3, 4 and 5.
There are some other differences in the benefits, the primary being that in Tier 1 you could retire at age 55 with a full pension. Later tiers you have to work until you’re 62, and if you retire before age 62 your pension is significantly reduced. The big difference in the plan that was adopted two years ago, Tier 5, is that prior to that time employees paid into the pension plans for the first 10 years they were working. That has now changed so that under Tier 5, people who are hired pay 3 percent into the pension funds all of their careers.
 
You mentioned that only about 4 percent of the workforce is in tiers 1 or 2.  How does it break down for the other tiers?
For the state retirement system, roughly 91 percent are in tiers 3 and 4.  About 5 percent are in Tier 5.  The reason why there’s that small number in Tier 5 is that it only began two years ago.
A lot of people don’t understand the real nature of these pension benefits because attention tends to get focused on the small number of cases where someone’s getting a big pension. The average pension in the state retirement fund is $19, 151 per year, and 76 percent of the pensions are less than $30,000.
 
Gov. Cuomo is pushing for a Tier 6 to be created for new state employees.  How would the deal for Tier 6 differ from previous tiers?
The governor’s plan changes the benefit structure in a number of ways, and when you add them all together what they amount to is that over the lifetime of a worker their pension benefit will be reduced by about 40 percent from Tier 5.
It accomplishes that in part by requiring you to work longer; you wouldn’t be able to collect your pension until you’re 65. The formula of how much you would get for each year of service is also reduced. The other big change the Governor is proposing is to significantly increase the amount that employees have to pay into the pension plan. Instead of paying 3 percent of your salary, you would pay 4 or 5 or 6 percent. For the majority of our members, they would be required to pay 6 percent of their salary. They would be doubling the amount they’re required to pay in.
 
Once you’re in a certain tier, is your pension set in stone?
The plan can’t change. Once you’re in particular tier, you’re guaranteed that the benefit structure will stay for that tier. More than 40 years ago, the courts ruled that it is unconstitutional to reduce an employee’s pension benefit after they’ve been hired under a particular pension plan.  This is under the New York State Constitution.
 
What about the increasing costs from pensions faced by New York State?
The current discussion about the proposed Tier 6 and about the pension system overall is driven largely by the fact that the costs to the employer, that is to say state and local governments, have been going up significantly in the last few years. That’s a legitimate concern.
The thing that’s important for everyone to understand is that cost has not gone up because the benefits went up.  The reason why the employer costs are going up is because 83 percent of the benefits coming out of the state pension system are paid not by the taxpayer or by employees putting money in; they’re paid by the pension fund investing those moneys and making a return on the investment by investing in stocks and bonds. When the stock market crashed in 2008, the pension fund like all investors experienced significant losses.
People who are advocating for Tier 6 are trying to lead people to believe that the current cost increases will go on forever.  The Governor uses the term “unsustainable” to say these cost increases can’t keep going up because it will bankrupt everyone.  That might be true if the cost increases were going to go on forever, but they are not. The actuaries for the state pension system, the New York City pension system, the teachers retirement system all say the same thing – these costs will peak out and decline as the economy stabilizes.

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