1. NEW CASE STUDY EXAMINES HOW DISMANTLING PENSIONS TRIGGERED MASS EXODUS OF PUBLIC SAFETY WORKERS:
A new case study examines the impacts of the 2012 actions of the Town of Palm Beach, Florida, to close its existing defined benefit (DB) pension systems for employees, including police officers and firefighters. The new “combined” retirement plans offered dramatically lower DB pension benefits and new individual 401(k)-style defined contribution (DC) retirement accounts. Shortly thereafter, the town experienced a high rate of retirements and unprecedented early departures of experienced police officers and firefighters to neighboring towns that offered better pensions. Now understaffed, the town faced increased costs to pay overtime hours and train replacements for more than 100 public safety workers who departed during a four-year period after the pension changes. Following this large, swift exodus of public safety employees, the town reconsidered the changes. In 2016, the Town Council voted to abandon the DC plans and to improve the pension plan for police officers and firefighters. These findings are contained in new research case study from the National Institute on Retirement Security (NIRS), Retirement Reform Lessons: The Experience of Palm Beach Public Safety Pensions.
- Download here the case study.
- Watch here a video of a public employee regarding changes to the retirement plan.
“This case study serves as a cautionary tale to public sector employers considering changes to their employee retirement plans,” says Diane Oakley, report author and NIRS executive director. “The town learned the hard way that pension plans – provided to nearly all police officers and firefighters across the country – help keep experienced public safety workers on the job protecting our communities. The Palm Beach saga was a painful and costly lesson that pensions are a critical workforce management tool to recruit, retain and retire public employees,” Oakley said. Research finds that public workers place a high value on retirement benefits, even more so than private sector workers. For public safety workers, pensions are highly valued because they also offer death and disability benefits, and because the risks and physical demands associated with their jobs can shorten their years in the workforce. “Perhaps the most compelling data point in the case study is that a total of 53 mid-career police officers and firefighters left their jobs before retirement after the Town Council voted to change the pension plan,” Oakley explained. “Previously, just two mid-career public safety workers left their jobs before reaching retirement. Faced with unprecedented departures and large overtime and training costs, the town moved to unscramble the egg and restore the pension plan,” Oakley said. This case study supplements past NIRS research examining retirement plans in Alaska, Michigan and West Virginia where a shift from DB pensions to 401(k)-style individual accounts caused pension plan costs to skyrocket. The new case study also can be considered alongside recent NIRS research that examines the employee recruitment and retention impacts of pensions.
The case study finds that pensions:
- Dismantling the DB pension benefit caused a mass exodus of public safety officers. Employees’ reactions to losing their expected DB pension benefits were swift. The town’s two public safety pensions covered 120 employees at the end of 2011. In addition to 20 percent of the town’s workforce retiring after the change, 109 other protective officers left before retirement in the next four years. Mid-career public safety officers departed in unprecedented numbers, with 53 vested police officers and firefighters departing Palm Beach’s forces from 2012 to 2015. By comparison, just two mid-career employees departed from 2008 to 2011.
- Neighboring towns benefited from the changes that Palm Beach implemented to its retirement plans. Nearby towns watched the controversy erupt in Palm Beach, and decided to adjust their pensions rather than dismantle this employees benefit. The 109 trained officers who decided to leave Palm Beach provided a talent pool for other towns and counties. For example, in the next four years, 31 newly-hired Palm Beach firefighters left with a refund of their pension contributions and seemed to jump at the chance for a DB pension offered by a nearby town. Previously, only three firefighters took refunds in the four years before the pension freeze.
- The shift away from the DB pension increased costs in other areas. The town did not anticipate the financial impact of the high attrition. For example, firefighters had to work extremely high levels of overtime to fill staffing gaps. Also, the unprecedented loss of new and experienced public safety officers caused the town’s training cost to soar likely reaching upwards of $20 million, based on an “all in” cost estimate of $240,000 per officer to bring a new police officer through the rookie period in Florida.
- The DC switch proved a failed experiment in Palm Beach. The Town Council voted in 2016 to abandon the DC plans and improve the DB pensions for police officers and firefighters by raising benefits substantially and lowering the retirement age. The Council offset the cost of the police and fire DB pension improvements by increasing employee contributions and eliminating the DC plan with its employer match.
The National Institute on Retirement Security is a non-profit, non-partisan organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers and the economy as a whole. Located in Washington, D.C., NIRS’s diverse membership includes financial services firms, employee benefit plans, trade associations, and other retirement service providers. More information is available at www.nirsonline.org.
2. FINANCIAL HEALTH IMPROVED FOR LARGEST U.S. CORPORATE PENSION PLANS IN 2017:
The projected funded status of pension plans sponsored by the nation’s largest corporations realized modest gains in 2017, rising from 81% to 83%. Higher aggregate contributions were mostly due to higher-than-expected contributions from several large plan sponsors. These companies’ estimated pension deficit declined by $25 billion, dropping from $317 billion at year-end 2016 to $292 billion by year-end 2017. Buoyed by strong market returns and larger-than-expected employer contributions — but weakened by historically low discount rates — the projected funded status of pension plans sponsored by the nation’s largest corporations realized modest gains in 2017, rising from 81% to 83%. For this annual study, Willis Towers Watson analyzed 389 Fortune 1000 companies that sponsor U.S. defined benefit (DB) plans with fiscal years ending in December. The analyses estimated funded status for 2017 on an accounting basis, which is the value of plan assets divided by the projected benefit obligation (PBO). On an aggregate basis — total assets divided by total liabilities for all 389 firms — funded status ticked up to an estimated 83%, after holding at 81% for the previous three years. These companies’ estimated pension deficit declined by $25 billion, dropping from $317 billion at year-end 2016 to $292 billion by year-end 2017. Over 2017, the interest rates used to measure pension obligations — high-quality (AA), long-duration corporate bond yields — dropped by 51 basis points, and lower interest rates drove the PBO higher. Investment returns were very strong for the year, and sponsors made higher contributions than they had in the past. Thus, while the PBO grew by an estimated 4%, plan assets were up by 6.8%. Pension obligations have been declining over the past few years (before factoring in settlements, changes in interest rates, mortality and other assumptions), as benefit payments flowing out of these plans now exceed service cost (the value of benefits accrued during the year) and interest cost. This can be attributed to an uptick in pension freezes over the past decade, which has been reducing aggregate service cost over time. Liability settlement activity over the past five years has also played a part in reducing aggregate PBO. The increase in PBO during 2017 would not have occurred without the interest rate decline. Based on Willis Towers Watson’s modeling and movements in high-quality long-duration corporate bond yields, it estimated a discount rate decline of 51 basis points from 2016 to 2017, which constitutes a historical low. Changes in the discount rate significantly affect pension liabilities: The higher liability caused by the lower discount rate is reflected in the discount rate change. In 2014, the Society of Actuaries (SOA) published new mortality tables and projection scales that reflected past and anticipated longevity improvements, prompting many companies to revise funding assumptions, which drove up plan liabilities by 4% on average. The SOA has since updated the projection scales annually to reflect slightly lower life expectancies, and again some sponsors adjusted their assumptions accordingly, including in 2017. Meanwhile, many companies are adopting the 2018 minimum required lump sum mortality assumptions (based on new government regulations) for the first time, which will increase the PBO. A cap net PBO reduction of 0.1%, due to these changing mortality assumptions, was projected. In 2017, employers continued to settle liabilities through lump sum buyouts and annuity purchases. We reduced projected PBO by $25 billion due to such settlements (which are estimated to cost 5% more than the associated PBO). Equity markets continued to prosper in 2017. Bond returns were also strong, especially for long-duration bonds, which are typically used in liability-driven investment (LDI) strategies. Aggregate investment returns for 2017 are estimated at 13.1%, well above expectations of 7%. To estimate asset returns, they used company-specific asset allocations as of January 1, 2017, as reported in the 10-K footnotes. They categorized assets as public equity, private equity, debt, cash, real estate, hedge funds and other. They based equity returns on a 60/15/25 mix of domestic large capitalization, domestic small/mid-capitalization and international equities. We based large-cap returns on the S&P 500 Total Return Index, small/mid-cap returns on the Russell 2500 Index and international equities on the MSCI EAFE Index. Equity returns varied, with international equities up 25%, while small/mid-cap equities were up 17%. Estimates for private equities were assumed to be the same as returns for public equities: 22% for 2017. Debt returns were based on a 55/22.5/22.5 mix of Barclays Aggregate Index, Barclays Long Government Index and Barclays Long Credit Index. Long corporate and long government bonds, typically used in LDI strategies, earned 12.2% and 8.5%, respectively. So, in another year of declining interest rates, sponsors using LDI strategies successfully hedged against the interest rate drop — but missed some gains from the equity windfall. Total debt returns were estimated at 7% for 2017. Estimated real estate returns were based on a blend of the National Council of Real Estate Investment Fiduciaries Property Index and the Vanguard REIT Index Fund, and returns for hedge funds were based on Hedge Fund Research’s Global Hedge Fund Index. Returns for cash were based on three-month Treasury bills. Estimates for other returns were based on a 50/50 blend of equity and debt returns. In 2017, returns were 5.9% for real estate, 6% for hedge funds, 0.1% for cash and 14.2% for other. To estimate employers’ cash contributions for 2017, The analyses generally used projected contributions from prior-year disclosures. They estimated 2017 plan contributions at $51.2 billion — up roughly 20% from last year ($43.1 billion). Contributions were nearly twice the amount needed to cover benefits accruing during the year. Higher aggregate contributions were mostly due to higher-than-expected contributions from several large plan sponsors, which could be a response to rising Pension Benefit Guaranty Corporation premiums, a desire to prefund future contributions, growing interest in de-risking strategies and the possibility of lower corporate tax rates. To conclude, robust investment returns combined with larger-than-expected plan contributions offset the higher PBO caused by yet another year of declining interest rates. At 83%, funding levels were (modestly) higher than they have been since 2013. The uptick in funded status is welcome news. As for the future, many plan sponsors are just now digesting the new tax law and the implications for their benefit plans. Employers should consider their broader pension management strategy as they make that evaluation, which could mean reviewing their investment strategy or implementing pension de-risking strategies, such as an annuity purchase.
3. THE ARGUMENT FOR DITCHING THE 401(K) AND STARTING OVER; YES, THERE IS A WAY TO PROVIDE AN ADEQUATE RETIREMENT FOR EVERYONE, NOT JUST THE AFFLUENT:
There have been some modest attempts in the past few years to shore up and fill in gaps in this country's haphazard system of retirement savings. These attempts – federal myRA accounts, state-run retirement accounts, and fiduciary standards for retirement account providers -- have also all been shut down, rolled back or delayed since Donald Trump moved into the White House a year ago. So it may seem like a curious time to talk about tossing aside the current system of 401(k)s and individual retirement accounts in favor of an entirely new retirement savings system, as Teresa Ghilarducci and Tony James do in their book, "Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans," which after an earlier iteration in 2016 is now out in hardcover. But, hey, since the little stuff is not getting anywhere, why not go big? Ghilarducci is an economics professor at the New School for Social Research in New York who became kinda-sorta famous after she told a House subcommittee in October 2008 that 401(k)s gave big tax breaks to the affluent while not helping most Americans save adequately for retirement -- which Rush Limbaugh, who went on to spend years harping on her ideas, translated as"she wants to basically eliminate the 401(k)." James is the president and chief operating officer of private equity giant Blackstone Group LP, as well as nonexecutive chairman of the board at Costco Wholesale Corp. The two unveiled their unlikely buddy act in 2015. The plan they have developed would supplant 401(k)s and individual retirement accounts with mandatory Guaranteed Retirement Accounts that have these defining characteristics:
- Workers and employers would each contribute 1.5 percent of wages or salary, maxing out at $3,750 each (1.5 percent of a $250,000 salary); the self-employed would contribute 3 percent.
- Everyone contributing to a GRA would get a $600 refundable tax credit, meaning that for low-income workers, there would be no out-of-pocket cost to the accounts. On top of that, there would be a tax deduction for contributions maxing out at $3,750. Workers could still contribute to GRAs up to the current 401(k) limits of $18,500 and $24,500 and enjoy tax-deferred gains on those contributions; they just would not get the upfront tax deduction.
- Workers would own their GRA accounts and choose a pension manager to invest the money. But they would not be able to withdraw money from the accounts before retirement.
- Upon retirement, the accounts would be converted into annuities, with monthly payments calculated and administered by the Social Security Administration. These payments would also be guaranteed by the federal government. This guarantee would most likely never come into play, Ghilarducci and James argue, but the government could at very low cost create a fund to insure against this worst-case scenario. Also, account holders could choose not to annuitize up to 25 percent of the account, but only if the annuity on the remaining amount would, along with Social Security, keep them above the poverty line.
This setup is similar in some ways to the "superannuation" system set up in Australia in the early 1990s, which has given the country what is now considered one of the world's best retirement savings systems. The two key differences are that the GRA contributions would be much lower than the 9.5 percent of income currently required in superannuation (which is scheduled to rise to 12 percent by 2025) and that with GRAs, annuitization would be mandatory. Much of the difference between the contribution rates can be explained by the existence in the U.S. of Social Security, which would be left untouched by the Ghilarducci-James plan, already imposes a payroll tax of 12.4 percent (half paid by the employer, half by the employee) and provides more generous benefits than Australia's government-funded, means-tested Age Pension. But requiring annuitization also reduces the amount of money that needs to be saved. That's because it costs a lot less per person to guarantee an adequate lifetime income for an entire generation than for an individual. When providing an annuity for millions of people, you can take the money saved when recipients die earlier than expected and use it to finance the retirements of those who live longer than expected. It's a morbid and in some ways inequitable wealth transfer, given that affluent people tend to live longer than poor people, but it costs a lot less than everybody saving for themselves. Americans have actually set aside far more money for retirement as a share of gross domestic product than the residents of most wealthy countries, but the general lack of annuitization means all that saving may not prove adequate for many. Three percent of income is also a lot less than 10 percent of income or more that financial advice givers in the U.S. often say people should set aside for retirement. Annuitization plays a role here, of course. Also, those with higher incomes willneed to set aside more than 3 percent, since Social Security replaces a smaller percentage of their incomes. Ghilarducci and James simply figure -- and there is recent economic research to back this up -- that affluent people do not need tax deductions to get them to save for retirement. Finally, they assume that the pension managers in the GRA system would get much higher returns than most people do now in their 401(k)s and IRAs. This is not a baseless assumption: IRAs and 401(k)s Underperform. Defined-benefit pension funds get a lot of bad press, some of it deserved. But when a state pension fund runs into trouble these days, it is usually because elected officials have promised too much and/or failed to set aside enough money, not because the fund managers have blown it. In the Ghilarducci-James plan, "state pension funds, traditional money managers, or a federal entity such as the Thrift Savings Plan" could bid to manage GRAs. These pension managers would get higher returns than existing 401(k)s and IRAs do, they figure, because (1) they are more sophisticated investors than most 401(k) and IRA owners, (2) they'll be able to invest in illiquid assets such as infrastructure and private equity that are generally off-limits in 401(k)s and IRAs, and (3) their administrative costs would be lower, as would their fees. No, none of this is going to come to pass anytime soon. And even over the longer run, incremental improvements to the current system seem a lot likelier than a massive overhaul such as the GRA. But the Ghilarducci-James plan raises several issues that really ought to be a part of any national discussion about retirement. One is annuitization, which I have been harping on for years now. Another is the wisdom (or lack thereof) of leaving individuals in charge of all their retirement saving, asset allocation and investment decisions, which has been addressed by some 401(k) sponsors in recent years (with default contributions into target-date funds, among other things) but is still a big issue for the IRAs that most 401(k) accounts eventually get rolled into. Finally, there is the question of whether the more than $200 billion in annual tax breaks for retirement savings should mainly benefit the top 20 percent of the income distribution, as is now the case, or be targeted to make it more likely that everybody has an adequate retirement income. The autor, Justin Fox, wrote this opinion-piece for Bloomberg.
4. AVOID BIG SURPRISES AFTER YOU RETIRE – LIKE A MAJOR REDUCTION OF YOUR SOCIAL SECURITY:
There are two ways in which state and local government employees can receive a “rude awakening” from the Social Security Administration: Through the application of the Windfall Elimination Provision or the Government Pension Offset, or both. Because the loss of a significant or, for that matter, any portion of your Social Security benefit is a serious thing, we start by clarifying who may be subject to these reductions and who is not. The WEP generally applies to employees who have worked both in a private or public sector position that was subject to Social Security and in a public sector position that was not subject to Social Security. You will not be subject to a WEP reduction of your Social Security benefits if you paid Social Security taxes on at least 30 years of substantial earnings (an indexed annual amount that was $23,625 for 2017 — less for prior years). By contrast, the GPO is a potential reduction in Social Security benefits that may be payable to a spouse or surviving spouse of a Social Security beneficiary. Like the WEP, the GPO applies to spouses and surviving spouses of employees who have worked both in a private or public sector position that was subject to Social Security and in a public sector position that did not pay into Social Security. The GPO will not be applied to reduce a surviving spouse’s Social Security benefit in situations where the surviving spouse has paid into Social Security, based on his own earnings for at least 60 months prior to becoming eligible for Social Security. How does the WEP operate to reduce your Social Security benefits? According to the Social Security Administration, your Social Security benefit is a function of your average monthly earnings. Monthly average earnings are divided into three segments, and then the earnings within each segment are multiplied by a specified percentage. For example, if you turned 62 in 2017, the first $885 would be multiplied by 90 percent, earnings between $885 and $5,336 by 32 percent and the balance by 15 percent. Your monthly basic Social Security benefit (also referred to as your Primary Insurance Amount, or PIA) is the sum of these products. However, if you worked in a public position that was not subject to Social Security and you had less than 30 years of substantial earnings in Social Security covered employment, the 90 percent factor used to calculate your PIA is reduced according to a table. For example, the 90 percent factor is reduced based on your years of substantial earnings in Social Security covered employment from 90 percent (for 30 or more), to 45 percent for 21 years, and to 40 percent for 20 years or less. Most people can do the math, but for those of us who are arithmetically challenged, the SSA provides a WEP calculator online. Note that the WEP will not reduce your Social Security benefit by more than half of your pension for earnings on which you did not pay Social Security taxes (“WEP Maximum”). For example, if you turn 62 in 2017, have average monthly earnings of $4,000, 15 years of substantial earnings in Social Security covered employment and a pension resulting from non-Social Security covered employment, the 90 percent factor will be reduced to 40 percent. Therefore, subject to the WEP Maximum, your monthly benefit will be reduced from $1,793.30 to $1,350.80 because of the WEP. However, if your pension resulting from non-Social Security covered employment is $500 per month, the WEP Maximum will limit the WEP reduction to $250 rather than the intended $442.50 WEP reduction, such that your adjusted monthly Social Security benefit would be $1,543.30 rather than $1,350.80. What about the GPO? Basically, it works to reduce the amount of any spouse’s, widow’s or widower’s benefit from Social Security you may receive by two-thirds of any government pension you also receive. For example, if you receive a monthly CalPERS pension of $600, two-thirds of that, or $400, must be deducted from your Social Security spouse’s benefit. If you are receiving $500 in Social Security benefits, the GPO would reduce that $500 monthly amount to only $100 ($500 – $400). If two-thirds of your government pension is more than your Social Security benefit, your benefit could be reduced to zero. I have seen how this works, because the GPO was applied to one of my parents’ Social Security benefit. Once again, if you need help figuring this out, there is an online GPO calculator. So, if you have worked in a position that was subject to Social Security and in a position that was not subject to Social Security, it makes good sense to analyze whether you could be impacted by either the WEP or the GPO and to determine if there is anything you would want to do to mitigate those impacts. As part of the process, it would not hurt to check on the accuracy of your Social Security earnings record and your projected Social Security benefits. To do this, click here.
The above piece was presented by Focus on Public Benefits, a dialogue about California’s public employers and employees achieving sustainable employee benefit plans using the legal options available.
5. FEDERAL JUDGE: FLORIDA’S FELON VOTING RESTORATION FLAWED:
The Associated Press reports that , in a ruling that could reverberate in this year’s crucial elections, a federal judge ruled that Florida’s system of restoring voting rights for felons who have served their time is arbitrary and unconstitutional, and needs to be changed as soon as possible. U.S. District Judge Mark Walker issued the blistering ruling in response to a lawsuit filed last year against Gov. Rick Scott by a voting rights organization. Plaintiffs include people whose requests to restore their right to vote were turned down even though they completed their prison sentences. Walker, who was appointed by President Barack Obama, ordered both sides to offer ways to remedy the system. His 43-page ruling blasted Scott and state officials for the current system to restore voting rights, which can take years. “A person convicted of a crime may have long ago exited the prison cell and completed probation,” Walker wrote. “Her voting rights, however, remain locked in a dark crypt. Only the state has the key — but the state has swallowed it.” John Tupps, a spokesman for Scott, defended the process and suggested an appeal is likely. “The governor believes that convicted felons should show that they can lead a life free of crime and be accountable to their victims and our communities,” said Tupps. “While we are reviewing today’s ruling, we will continue to defend this process in the court.” The ruling comes just months before Florida voters will be asked to alter the current ban. Backers of a constitutional amendment won a place on the November 2018 ballot. If sixty percent of voters approve, most former prisoners would have their rights automatically restored. For decades, Florida’s constitution has automatically barred felons from being able to vote after leaving prison. The state’s clemency process allows the governor and three elected Cabinet members to restore voting rights, although the governor can unilaterally veto any request. Walker said in his ruling that the automatic ban is legal, but the process cannot be arbitrary or swayed by partisan politics. He noted, for example, that Scott and the Cabinet restored voting rights to a white man who had voted illegally but told Scott that he had voted for him. Walker also pointed out that others who acknowledged voting illegally — but were black — had their applications turned down. Florida has a slow process for restoring voting rights to felons who have completed their sentences. It requires a hearing, and applicants are often denied. Shortly after taking office in 2007, then-Republican Gov. Charlie Crist convinced two of the state’s three Cabinet members to approve rules that would allow the parole commission to restore voting rights for non-violent felons without hearings, and within a year, more than 100,000 felons were granted voting rights. But Gov. Rick Scott and Attorney General Pam Bondi pushed to end automatic restoration of voting rights as one of their first acts upon taking office in 2011. Since then, most former prisoners have to wait at least five years before they can even apply to have their rights restored. Over the last seven years, fewer than 3,000 of them have had their rights restored. “Today a federal court said what so many Floridians have known for so long: that the state’s arbitrary restoration process, which forces former felons to beg for their right to vote, violates the oldest and most basic principles of our democracy,” said Jon Sherman, an attorney with the Fair Elections Legal Network. “While the court has yet to order a remedy in this case, it has held in no uncertain terms that a state cannot subject U.S. citizens’ voting rights to the limitless power of government officials.” Florida’s ban on felon voting — along with a voting list purge that took some non-felons off voting rolls — likely cost then-Vice President Al Gore the 2000 presidential election. Republican George W. Bush won Florida that year, and thus the White House, by 537 votes in an election that took five weeks to sort out. Before the 2000 election, then-Secretary of State Katherine Harris hired a company to purge felons from the state’s voting lists. But the process was flawed and many eligible voters were removed from rolls because of mistaken identity. Others were convicted of misdemeanors and not felonies.
6. NEW OFFICE ADDRESS: Please note that Cypen & Cypen has a new office address: Cypen & Cypen, 975 Arthur Godfrey Road, Suite 500, Miami Beach, Florida 33140. All other contact information remains the same.
7. CLEVER WORDS:
Rubberneck: What you do to relax your wife.
8. INSPIRATIONAL QUOTE:
I have learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel. – Maya Angelou
I wondered why the baseball kept getting bigger. Then it hit me.
10. TODAY IN HISTORY:
On this day in 1872, Yellowstone becomes world's 1st national park.
11. THINK YOU KNOW EVERYTHING?:
The microwave was invented after a researcher walked by a radar tube and a chocolate bar melted in his pocket.
12. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.