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Cypen & Cypen
March 13, 2014

Stephen H. Cypen, Esq., Editor

1. RETIREMENT SECURITY IN AN AGING SOCIETY: The share of the U.S. population over the age of 65 was 8.1% in 1950, 12.4% in 2000, and is projected to reach 20.9% by 2050, according to National Bureau of Economic Research. The percent over 85 is projected to double from current levels, reaching 4.2% by mid-century. The aging of the U.S. population makes issues of retirement security increasingly important. Elderly individuals exhibit wide disparities in their sources of income. For those in the bottom half of the income distribution, Social Security is the most important source of support; program changes would directly affect their well-being. Income from private pensions, assets and earnings are relatively more important for higher-income elderly individuals, who have more diverse income sources. The trend from private sector defined benefit to defined contribution plans has shifted a greater share of the responsibility for retirement security to individuals, and made that security more dependent on choices they make. A significant subset of the population is unlikely to be able to sustain their standard of living in retirement without higher pre-retirement saving.  No kidding. NBER Working Paper No. 19930, (February 2014).

2. “WEP” COULD MAKE YOU WEEP: Every so often the Social Security Administration’s Windfall Elimination Provision rears its ugly head. This time, the subject is treated by the Wall Street Journal. If you have spent your working life in a government job -- say, teaching public school or fighting fires -- while also holding private-sector jobs, you could run into WEP when you retire. When you have contributed to both Social Security at one job and a pension plan at any job where you did not pay Social Security taxes, the monthly Social Security benefit you receive will fall short of what your annual statements project, and you are unlikely to know it until you file for Social Security benefits. This situation applies mostly to workers who began federal, state and local government jobs before 1984 or have worked abroad. It also affects public sector workers in more than a dozen states who still pay into a pension fund rather than Social Security, as it does to some people working for nonprofit agencies who do not contribute to Social Security. WEP was put in place to level the field between workers in low-wage jobs and those in full-time jobs with pensions who also work part-time, low-wage jobs. The formula used to determine Social Security benefits is designed to give workers with low-average lifetime incomes a benefit based on a bigger percentage of their earnings than higher earners get. The benefit formula is indiscriminate: it cannot tell if you worked full time at a low-wage, Social Security-covered job or at a part-time, temporary job that supplemented your pension covered position for 40-plus quarters. Before the formula was enacted in 1983, people who worked mainly in pension covered government jobs had their Social Security benefits calculated as if they were in long-term, low-wage jobs. (The formula does not apply to employers that offered pensions and withdrew regular Social Security payments.) WEP was created to account for windfalls received from dual careers. For the federal government it helped shore up Social Security's finances by eliminating double dipping. Opponents of the formula saw it as imprecise and regressive. Social Security benefits are determined by a three-tier formula that factors in certain percentages of average indexed monthly earnings. Average Index Monthly Earnings is determined by totaling your 35 highest years of wages, adjusted for inflation, divided by the number of months, 420.) The regular formula calculates benefits by adding up 90% of the first $816 earned each month, 32% of earnings from $817 to $4,917 and 15% of earnings over $4,917. WEP chops the 90% factor to 40% but leaves the others alone. Under the regular formula, a worker with a $1,500 monthly Average Index Monthly Earnings retiring in 2014 will get a monthly benefit of $953.28. But if that person has worked at a pension covered job as well as a Social Security covered job and has earned the required 40 quarters to receive Social Security benefits, WEP formula kicks in and cuts that benefit to $545.28 -- a reduction of $408. If you have 30 or more years of substantial earnings in Social Security covered employment, WEP no longer applies. The income level of "substantial earnings" changes each year: for 2014 it is an annual income of $21,750.

3. TAX REFUNDS FOR 2014 AHEAD OF LAST YEAR: By the end of February, more than 48 million tax refunds had been issued, an increase of 5.6% compared to the same time last year. The average refund this year is $3,034, up 3% compared to the average refund amount for the same time last year. Almost 88% of refunds to date have been directly deposited into the accounts of taxpayers, saving them time and a trip to the bank. The number of returns filed electronically is up slightly from the same time last year; however, the number of taxpayers filing from home computers is up 7.5%. At the end of the fourth week of the filing season, IRS had received almost 40% of the returns it expects to receive during 2014. [BULLETIN: IRS has just learned that 26 million of the 48 million tax refunds were issued to some guy in jail, using different identities.] IR-2014-23 (March 6, 2014).

4. UNION UPDATES LISTS OF MANAGERS OPPOSING DEFINED BENEFIT PLANS: The American Federation of Teachers released a second edition of its list of money managers that the union says manage defined benefit plans while simultaneously assisting or supporting organizations that are attempting to eliminate these very same pension plans.  The report, “Ranking Asset Managers A Retirement Security Report On Money Managers For Pension Fund Trustees -- Second Edition,” lists twenty-nine money management firms the union says have top executives who have contributed to, or sit on the governing board of, an organization that advocates replacement of defined benefit plans with defined contributions or cash balance plans. The union’s first report, published last April, has been amended twice to remove six firms.  The report is available on the union’s website at

5. POTENTIAL PROBLEMS FOR PRIVATE EQUITY FUNDS: Last year the United States Court of Appeals for the First Circuit decided important issues of first impression as to withdrawal liability for the pro rata share of unfunded vested benefits to a multiemployer pension fund of a bankrupt company.  The litigation considered the imposition of liability as to three groups: two private equity funds, which asserted that they were mere passive investors that had indirectly controlled and tried to turn around a struggling portfolio company; the New England Teamsters and Trucking Industry Pension Fund, to which the bankrupt company had withdrawal pension obligations and which sought to impose those obligations on the equity funds; and, ultimately, if the Trucking Pension Fund became insolvent, the federal Pension Benefit Guaranty Corporation, which insures multiemployer pension plans such as the one involved in the case. If the Trucking Pension Fund became insolvent, then benefits to workers would be reduced to PBGC guaranteed levels. (At present, that level is about $13,000 for employees with 30 years of service.) Two private equity funds that sought a declaratory judgment against the Trucking Pension Fund.  The Trucking Pension Fund, which brought into the suit other entities related to the equity funds, counterclaimed and sought payment of the withdrawal liability at issue. The court concluded that at least one of the private equity funds that operated the company, through layers of fund-related entities, was not merely a "passive" investor, but sufficiently operated, managed and was advantaged by its relationship with its portfolio company, now bankrupt. The court also concluded that further factual development was necessary as to the other equity fund. The court decided that the district court erred in ending the potential claims against the equity funds by entering summary judgment for them under the "trades or businesses" aspect of the two-part "control group" test.  As a result, the court remanded for further factual development and for further proceedings under the second part of the "control group" test, that of "common control."  The district court was, however, correct to enter summary judgment in favor of the private equity funds on the Trucking Pension Fund's claim of liability on the ground that the funds had engaged in a transaction to evade or avoid withdrawal liability. Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, Case No. 12-2312 (U.S. 1st Cir. July 24, 2013). Now, in a summary order, the United States Supreme Court has denied review. Investors in private equity funds now must consider the decision’s in context of future acquisitions and current holdings’ obligations.

6.  DATING ADS FOR SENIORS: FOXY LADY: Sexy, fashion-conscious blue-haired beauty, 80's, slim, 5'4' (used to be 5'6'), searching for sharp-looking, sharp-dressing companion. Matching white shoes and belt a plus.

7. ADULT TRUTHS:  I am always slightly terrified when I exit out of Word and it asks me if I want to save any changes to my ten-page technical report that I swear I did not make any changes to.

8.  TODAY IN HISTORY: In 1961, John F. Kennedy sets up the Alliance for Progress. (Also, on this very day, a sex-tape surfaced, supposedly involving JFK, his brother Robert and MM.)

9. KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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