Tier 6 - Cost Relief for City and the 8% Assumed Interest Rate

With the new Tier 6 pension benefit provisions in place it's time to check in on the long running circus called the "assumed interest rate". Since the spring of 2009 the NYCERS actuary has been delaying making a permanent recommendation on what is a reasonable expected rate of return for the assets of the city pension funds. Each year he has recommended one year extensions of the the current 8% rate.

The actuary has not yet reported on what the cost savings will be for the new Tier 6 pension benefits. But the tie in with the interest rate is critical.

With the current 8% interest rate the estimated annual cost to the city for the average city worker covered by Tier 6 will be about 1% of payroll. If the interest rate is 7% the cost goes up to 2.12% of payroll. If you want to be even more conservative with a 6% interest rate, then the annual cost goes up to 3.6% of payroll.

The following are estimated total dollar costs with different interest rates for a Tier 6 worker who starts at a $25,000 per year salary and retires with a $45,200 pension 42 years later:

1. 8%: city = $18,210 worker = $60,127
2. 7%: city = $38,605 worker = $60,127
3. 6%: city = $65,556 worker = $60,127

You can easily see how important the assumed interest rate is.