Wednesday, February 29, 2012

Tier 6 - Pension Math - New Trustees

Just a little math on Cuomo's "pension reform" for government workers.

If a person starts working at age 21 for the city under Tier 6 with a salary of $25,000 and retires at age 65 with a final salary that went up 2.5% per year, his/her pension would be $48,881 after 44 years of service with the city.

If NYCERS earns an annual rate of return of 7% on its investments and uses a 7% annuity factor, this benefit will only cost the city .4% of payroll, $7,855, over the 44 years. That is an average of $179 a year. The employee will have contributed $90,975 over the 44 years.

Maybe with this radical cost shift the workers should have the majority vote on the city pension boards. It might be interesting if the members, retirees, and beneficiaries voted in an open election for the majority of the trustees.


In contrast to the 7% assumption, if NYCERS only earns 5% on its investments and uses a 5% annuity factor, the city's cost for the $48,881 benefit rises drastically to 4.83% of payroll, $94,852, over 44 years. This amount is similar to what the employee must contribute.

The increase in cost for the city makes it every clear how important it is to the city and the employee that the pension funds are careful about their investment decisions. To use a baseball expression, this is all about making contact, not hitting the ball out of the park.

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