Why city workers’ pensions could go way up as your 401(k) tanks

With S&P stock down nearly a quarter this year, the worst performance in half a century, and inflation at 8%, cutting deeply into savings, it’s time to worry about pensions. Your pension — and the retirement security of the city’s government workers, which you also have to pay for.

If you work in the private sector, unless you sold all your stocks and bonds last year and bought some luxury purses, you’re probably feeling a little bit poorer this year when looking at your 401(k).  

So you’re likely a little envious of people who work for city government — some of the only people left with guaranteed pension income.

A teacher who retired in 2021 after 27 years of work, for example, with an average final salary of $83,173 collects a $53,916 annual pension.  

For uniformed employees, benefits are better: An NYPD officer can retire after 22 years with half his average salary. As of 2019, the average salary for an officer with 20 to 24 years of service was $147,099. And people close to retirement can beef this up with overtime.  

These benefits cost city taxpayers a lot of money. New York will spend $9.4 billion this year on contributions to its pension funds — 14% of the tax revenues it takes in. The city then invests those contributions in the stock and bond markets to earn a return big enough to pay the benefits it’s promised.

Even before recent market disasters, New York hadn’t put quite enough money away for future benefits. As of last year, New York owed $221.1 billion in future pension benefits and had $211.5 billion set aside to pay for them, for a $9.6 billion shortfall.  

That might not sound so bad — but this was during the biggest boom in the broad stock market in history. Between late 2010 and late 2021, the S&P 500 index of stocks more than tripled. 

NYC Comptroller Brad Lander spaekinnng at a press conference announcing gun safety proposals that would hold credit card companies accountable for suspicious activity involving gun purchases.
City Comptroller Brad Lander expects that taxpayers will have to put an additional $5.9 billion into its pension funds over the next three years.
William Farrington

Now that the market is going in the other direction, the city is going to have to sock even more money away to make up for these losses.

City Comptroller Brad Lander expects that taxpayers will have to put an additional $5.9 billion into its pension funds over the next three years, or an average of nearly $2 billion annually, starting next year. 

That’s a 25% increase to the $7.8 billion annually the city was already planning to put into the funds. (The city had expected the amount to drop from this year’s $9.4 billion — because the stock-market boom was supposed to keep going.)

A board displays market activity on the floor of the New York Stock Exchange (NYSE) on September 16, 2022 in New York City.
A board displays declining market activity on the floor of the New York Stock Exchange on Sept. 16.
Getty Images

If the market doesn’t turn around quickly, these extra pension contributions are the biggest factor in turning next year’s projected $4.2 billion budget deficit into a $6.4 billion gap.  

One sad thing is even these increased contributions won’t help current city-government retirees, who, for the first time in two generations, will grapple with near-double-digit inflation eating into their incomes. Cost-of-living increases for city pensioners are capped at 3% annually and apply only to the first $18,000 in retirement income. 

Yes: Even city workers, with their gold-plated pensions, are going to suffer the effects of sustained high inflation, for the first time since the early 1980s. That’s why you don’t want high inflation in the first place — there are so few winners, really none.

But the far bigger risk is to city taxpayers, who must fund these extra contributions even as their own retirement savings tank. And the risk goes well beyond next year’s projected pension-contribution hikes.

A greater peril is that with virtually all labor contracts between the city and its unions expired, Mayor Eric Adams could offer a double-digit raise to current city workers, with no possibility that they make concessions to their future pension benefits in return because the state constitution prohibits such “diminishment.”  

For city workers close to retirement, double-digit raises this year or next would substantially hike their pension benefits — as, remember, benefits are based on their final salaries. If their salaries go up by, say, 15% the next two years, their future pension benefits will rise too.

Adams can’t do much about baked-in pension costs. In fact, Gov. Kathy Hochul already sweetened pensions this year in her first state budget, even as the market turned down, and she and lawmakers will be under a lot of pressure to increase retirees’ payments for inflation.

NYC Mayor Eric Adams tours asylum seeker resource navigation center, The American Red Cross.
Mayor Eric Adams could offer a double-digit raise to current city workers, with no possibility that they make concessions to their future pension benefits.
Robert Miller

Pensions are a classic element of New York’s governing dysfunction: The state sets the benefits, but the city must pay the bill, meaning it’s hard for voters to know exactly who to blame.

But Adams can make sure not to bake more future costs in — by holding the line on wage increases. 

Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.  

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