Current Pension Topics
ITHP Sweetens Retirement

By JOEL L. FRANK

Q.: I'm a Tier 1 member of the New York City Employees Retirement System. I have 40 years in and will be retiring shortly. I just found out about an account called "Increased-Take-Home-Pay." The NYCERS people told me this account will be converted to an annuity and then added on to my pension. Please explain what this is all about.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net .

M.S.

A.: Prior to the establishment of Tier 1 benefits in the late 1960s, the law governing NYCERS benefits required the participant to contribute at a rate that would provide half the retirement allowance, with the city guaranteeing the other half. The employee's half was referred to as the "annuity," while the city's half was referred to as the "pension." Taken together they generated the "retirement allowance."

This 50-percent cost-sharing required a much-greater employee contribution rate than the 3 percent of today. A contribution rate in the double digits was not uncommon. And it was payable for one's entire career. It was, indeed, a hardship.

Having said all that, in the early 1960s, Mayor Robert Wagner was approached by the municipal labor leaders with a proposal that upon implementation would, without raising salaries, provide the employee with an opportunity/option to increase his or her take-home-pay. How? By the city paying some of the employee's certified contribution rate. The city's new contribution would be placed in a participant account called Increased-Take-Home-Pay (ITHP). The account would earn a stated rate of interest, and upon retirement the balance would be used to provide a lifetime annuity. Once the rate that the city would pay was negotiated, the employee would have a choice of taking increased-take-home-pay by reducing his or her certified contribution rate by the rate for Increased-Take-Home-Pay, or continue to pay the full certified rate and thereby receive a greater annuity during retirement. Most elected to increase their take-home pay.

Example: If memory serves me well, I believe the rate for Increase-Take-Home-Pay was first set at 8 percent. If the employee's certified rate was 15 percent and the employee wanted an increase in take-home-pay, he/she would elect to reduce the 15-percent certified rate to 7 percent. The annuity portion of the retirement allowance was not affected because 15 percent was still being contributed: 7 percent by the employee and now 8 percent by the city.

If, on the other hand, the employee elected to waive increased-take-home-pay, he or she would continue to pay 15 percent. This would result in more than a doubling of the employee-funded annuity portion (15 percent rather than 7) of the retirement allowance.

With the passage of the enabling legislation, the retirement allowance pie now consisted of three parts: (1) a city-funded pension; (2) a city-funded pension (calculated as an annuity) from his/her Increased-Take-Home-Pay account and (3) an employee-funded annuity from his/her Accumulated Deductions account.

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Do you wish you contributed more to your 457(b) Deferred Compensation account during 2006? While 2006 is no longer, you still have an opportunity to reduce your taxes for 2006 and save for your retirement at the same time. Just contribute to the New York City Employee Individual Retirement Account Program (NYCE IRA) offered by the Deferred Compensation Plan of the City of New York (DCP). You can do this all on-line at: nyc.gov/html/olr/html/deferred/dcphome.shtml.

The IRA must first be established on-line and then you can write a check for the amount of your investment. Your check must be received by the DCP by April 17, 2007. Please don't wait for the very last day! Not everyone is entitled to a full deduction on their IRA investment. It all depends on your filing status (single, married, head of household, etc.) and Adjusted Gross Income. This is not the case with the DCP, and is the reason why I recommend that the 457(b) and the 401(k) Plans be used to maximize not only a tax deduction but also your savings/investment for retirement.