What does IBM know that most New York lawmakers don’t? Judging by Big Blue’s recent announcement that it is shifting to a defined-contribution pension plan, it knows that these plans are the only way forward for any company that hopes to stay on this side of bankruptcy court. Defined contributions have been the norm among small companies for years, but old industrial giants have been slow on the draw. Some, like General Motors, are still grappling with defined benefit pension programs that rattle and drag worse than the moneyboxes chained to Marley’s Ghost. There’s a lesson here for New Yorkers faced with troubled pension systems.

IBM, whose slogan is “Think,” is ditching its defined-benefit program, under which the company promised employees set pay-outs when they retired, in favor of a defined-contribution plan in which Big Blue will pay into 401(k) investment accounts today so that retirees can draw out the money themselves when they leave. The change will take effect in two years and will not affect the company’s 125,000 current retirees, employees whose pensions have already vested, or employees who retire before the new program is implemented.

IBM, which says the shift will save billions by the end of this decade, joins an ever-growing list of companies that have moved to defined contribution pension plans. The Bureau of Labor Statistics reckons that the share of all private-sector workers participating in defined-contribution plans soared to 42% from 36% in 1999. The percentage of private-sector workers in defined-benefit plans, in contrast, stagnated at about 21% during the same period. The absolute number of workers in defined contribution plans has shot up by 19% in the past six years; the number of workers in defined-benefit plans has increased by a mere 2%.

The real change has been among large firms, relics of the mid-20th century economy, which have been shifting from defined benefits, as a chart on page 6 shows. One need only look at GM’s woeful example. Until it finally reached a new deal with its union last fall, GM’s retirees were paying absolutely nothing toward their health care. Full pensions vest after 30 years on the job, a benefit first offered at least three decades ago and not touched since despite the lengthening life expectancy. GM now supports roughly 2.5 retirees for every one current employee. Partly as a result, GM lost $4 billion in the first nine months of 2005, its debt is rated at junk status, and it recently had to cut 30,000 jobs.

Yet the logic becoming so catastrophically clear to executives in the private sector still eludes lawmakers setting benefits for public employees. In 1998, the most recent year for which the federal labor data are available, a full 90% of state and local government workers nationally were in defined benefit programs. In New York, most public employees in both the city and state can retire at age 55 with partial or – often – full pension benefits. Many employees pay nothing into the pension fund while they’re working, and those who do pay generally put in only a small percentage, on the order of a few percentage points, and only during their first ten years of service.

Such generosity puts New York in a class almost by itself even among other government retirement programs, according to an analysis of BLS data performed by the Citizens Budget Commission. Some 78% of state and local government employees nationally contribute to their plans, and 74% of those who contribute pay in more than 3% of their earnings. This puts New York taxpayers on the hook for staggering amounts of money, as a nearby chart shows. The city’s pension obligations shot up an astounding 453% between the 2000 and 2005 fiscal years and are projected to hit $5 billion in 2007, according to a report prepared over the summer by the head of the Manhattan Institute’s Empire Center, E.J. McMahon. The state’s contributions to the funds that cover all employees outside the city except for teachers rocketed up by 670% between 2000 and 2004. Taxpayer contributions to the fund for public school employees outside the city topped even that, growing by 730% in two years alone and look set to double again in the next year. None of these projections yet accounts for any effects of the recently concluded MTA contract negotiation with city subway and bus drivers.

Who pays for this raid? The ordinary taxpayers in the city and state, and the way the system is currently rigged, it’s going to generate enormous payouts, which are looming for our taxpayers and will be discussed in the next editorial in this series on the growing cancer of public pensions. Not that an upside doesn’t exist. The trend among by private employers such as IBM is an example of what can be done when this problem is addressed in a realistic way. The thing to remember is that governments, like automobile companies, can fail, with their bonds being reduced to junk and their obligations unmet. There is still time for New York, though it is running out.