(October 21, 2011) — A new report issued by New York City Comptroller John Liu shows that the city’s public pension plans are more cost-effective for employees compared to the private sector, with efficiencies derived from investment expertise and leverage as institutional investors.
The study showed that New York City’s pensions provide retirement income at roughly 40% lower cost than individual accounts, paying equal retirement benefits as those used in the private sector but at a significantly lower cost while enabling the city’s pensions to “do more with less dollars.”
“Defined benefit plans have enormous economic efficiencies over defined contribution plans,” said the report — titled A Better Bang for New York City’s Buck — by the National Institute on Retirement Security (NIRS) and issued by Liu.
The report by the Washington, DC-based non-profit organization demonstrated that defined benefit savings are derived from three sources:
1) Superior investment returns: The pooled nature of assets in a defined benefit plan results in higher investment returns, partly based on the lower fees that stem from economies of scale, but also because the assets are professionally — not individually — managed.
2) Better management of longevity risk: New York City’s defined benefit plans save between 10% and 13% compared to a typical defined contribution plan.
3) Portfolio diversification: The ability to maintain portfolio diversity in the city’s defined benefit plans saves from 4% to 5%.
The report by NIRS used current data from the five New York City retirement systems. The study found that costs associated with traditional pensions range from 36% to 38% less than 401(k)-type individual accounts. “These findings are consistent with our national study on the cost efficiencies embedded in pension plans,” said Diane Oakley, NIRS executive director, in a statement. “The analysis clearly indicates that the qualities inherent in DB plans – particularly the superior investment returns and pooling of risks and assets – fuel their fiscal efficiency. The report provides important insight for policymakers, employers and employees, who are struggling to ensure adequate retirement income with the fewest dollars possible,” Oakley added.
Earlier this year, another study commissioned by Liu that predicted that New York City’s pension costs will peak in 2016 before they begin a gradual, steady decline attracted major criticism from Mayor Mike Bloomberg.
The report by Liu, a potential 2013 mayoral candidate, contrasted with Mayor Mike Bloomberg’s position that spiking pension costs are hindering the city’s ability to balance its budget. A spokesman for Bloomberg told the Wall Street Journal that Liu’s report is deeply flawed, assuming life-expectancy will not change, for example.
According to Liu’s report — titled Sustainable or Not? NYC Pension Cost Projections through 2060 — pension costs will grow at a slower rate than the city’s economy from 2016 through 2040 and beyond, using up significantly less of its budgeting resources. “Poor market performance over the past decade means we still have a few tough years ahead as those investment losses catch up to us. However, significant reforms already implemented in recent years will drive down costs for decades to come,” Liu said in a news release. The Comptroller attributed high pension costs partly to stock market losses.
aiCIO investigated New York City’s underfunded pension system in its Spring 2011 issue, revealing the tension between the Mayor and Comptroller.
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