With S&P stock down nearly a quarter this year, its worst performance in half a century, and 8% inflation hurting savings badly, it’s time to start thinking about pensions. Your pension – and the pensions of the city government employees who you Also have to pay.
If you work in the private sector, unless you sold all your stocks and bonds last year and bought a few luxury wallets, you’re probably feeling a little poorer looking at your 401(k) this year.
So you’re probably a little jealous of people who work for the city government – some of the only people who still have a guaranteed retirement income.
For example, a teacher retiring in 2021 after 27 years of service with an average ending salary of $83,173 would receive an annual benefit of $53,916.
Benefits are better for uniformed employees: an NYPD officer can retire after 22 years at half their average salary. As of 2019, the median salary for an officer with 20–24 years of service was $147,099. And people approaching retirement can spice it up with overtime.
These benefits are costing city taxpayers a lot of money. New York will spend $9.4 billion on contributions to its pension funds this year — 14% of the tax revenue it collects. The city then invests these contributions in the stock and bond markets to generate a return large enough to pay the promised benefits.
Even before Due to recent market disasters, New York had not saved enough money for future benefits. Last year, New York owed $221.1 billion in future pension benefits and had set aside $211.5 billion to pay them, for a $9.6 billion shortfall.
That might not sound so bad — but that was during the biggest broad stock market boom in history. Between the end of 2010 and the end of 2021, the S&P 500 stock index more than tripled.
Now that the market is going the other way, the city will have to shell out even more money to recoup those losses.
City Comptroller Brad Lander expects taxpayers to take the hit additionally $5.9 billion into its pension funds over the next three years, or an average of nearly $2 billion per year beginning next year.
That’s a 25% increase from the $7.8 billion a year the city already plans to put into the funds. (The city had expected the amount to fall from this year’s $9.4 billion — because the stock market boom was set to continue.)
Unless the market reverses quickly, those additional pension contributions are the biggest factor turning next year’s projected $4.2 billion budget deficit into a $6.4 billion gap.
A sad thing is that even these increased contributions will not help currently City government retirees who, for the first time in two generations, are struggling with near double-digit inflation eating away at their income. The cost of living increase for urban retirees is capped at 3% per year and only applies to the first $18,000 of retirement income.
Yes: even city workers with their gilded pensions will suffer the effects of persistently high inflation for the first time since the early 1980s. That’s why you don’t want high inflation – there are so few winners, actually none.
However, the far greater risk is borne by the municipal taxpayers, who even have to finance these additional contributions as their own old-age provision tank. And the risk goes well beyond projected pension contribution increases next year.
A greater danger is that with virtually all employment contracts between the city and its unions having expired, Mayor Eric Adams could offer current city workers a double-digit raise no Possibility that they make concessions on their future pension benefits in return, because the state constitution prohibits such a “reduction”.
For city employees nearing retirement, double-digit increases this year or next would significantly increase their pension benefits — remember, the benefits are based on their most recent salaries. For example, if their salaries increase by 15% over the next two years, their future pension benefits will also increase.
Adams can’t do much about baked-in pension costs. In fact, Gov. Kathy Hochul has already sweetened pensions in her first state budget this year, even as the market softened, and she and lawmakers will be under a a lot of the pressure to increase pension payments for inflation.
Pensions are a classic element of New York’s government dysfunction: the state sets the benefits, but the city has to foot the bill, meaning voters have a hard time knowing exactly who is to blame.
But Adams can make sure he doesn’t bake more future costs – by keeping the line with wage increases.
Nicole Gelinas is Associate Editor of the City Journal of the Manhattan Institute.