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Cypen & Cypen
May 15, 2014

Stephen H. Cypen, Esq., Editor

1. UPDATE ON STATE AND LOCAL GOVERNMENT SPENDING FOR PUBLIC EMPLOYEE RETIREMENT SYSTEMS: National Association of State Retirement Administrators has released a May 2014 Issue Brief on spending for public employee retirement systems. State and local government pension benefits are paid not from general operating revenues, but from trust funds to which public retirees and their employers contributed while they were working. On a nationwide basis, pension contributions made by state and local governments account for roughly 3.7% of direct general spending. Current pension spending levels, however, vary widely and are sufficient for some entities and insufficient for others. In the wake of the 2008-09 market decline, nearly every state and many cities have taken steps to improve the financial condition of their retirement plans and to reduce costs. Although some lawmakers have considered closing existing pension plans to new hires, most determined such change would increase, rather than reduce, costs, particularly in the near-term. Instead, states and cities have made changes to their pension plan by adjusting employee and employer contribution levels, restructuring benefits, or both. Generally, adjustments to pension plans have been proportionate to the plan’s funding condition and degree of change needed. Based on most recent information provided by the U.S. Census Bureau, approximately 3.7% of all state and local government spending is used to fund pension benefits for employees of state and local government. Pension costs have remained within a narrow range over a 30-year period, declining from around 5% to 3.7% in 2011. Although pensions are not the state-local budget-drain that some claim they are, spending levels for states and cities do vary from the national average, from just over one percent to more than six percent. The chronic failure by some pension plan sponsors to pay required contributions has resulted in greater future contributions to make-up the difference. Public pensions are financed through a combination of contributions from public employers and public employees, and investment returns on those contributions. Since 1982, investment earnings have accounted for approximately 61% of all public pension revenue; employer contributions, 26%; and employee contributions, 13%. Twenty-five to thirty percent of state and local governments and their employees make contributions to their retirement plan instead of to Social Security. This situation prevails for most to substantially all of the state and local government workforce in seven states, 40% of the nation’s public school teachers and a majority of firefighters/police officers. Pension benefits -- and costs -- for those who do not participate in Social Security are usually higher than for those who do participate, in order to compensate for the absence of Social Security benefits. This higher cost should be considered in context of the 12.4% of payroll, or an estimated $31.2 billion annually, these employers and employees would otherwise be paying into Social Security. The largest portion of public pension funding comes from investment earnings, which illustrates the major role this revenue source plays in determining pension costs. Other factors that affect pension costs include expectations for wage and general inflation, rates of worker retirement/attrition, and rates of mortality. Expectations for these and other economic and actuarial events typically are based on long timeframes, such as 20-to 50 years. Although the market decline of 2008-09 lowered public pension fund asset values, macroeconomic and demographic events also affect cost of the plan. These events include such changes as retirement rates, attrition/rates of hiring and wage growth, which is affected by salary cuts and layoffs. In addition, legislatures in nearly every state have made changes to pension benefits or financing structures, in some cases reducing plan costs and long-term obligations. On average, retirement programs remain a relatively small part of state and local government spending, although required costs, benefit levels, funding levels, and funding adequacy vary widely. Over $210 billion is distributed annually from these trusts to retirees and their beneficiaries, which reach virtually every city and town in the nation. Changes to benefit levels and required employee contributions adopted by states and cities have been diverse, dependent in part on such factors as legal authority to make changes to benefits or required employee contribution rates, and the plan’s financial condition prior to the market decline. Generally, states and cities with a history of paying their required pension contributions are in better condition and have needed more minor adjustments to benefits or financing arrangements compared to those with a history of not adequately making their contributions. (As state and local government contributions to pensions as a percentage of state and local government direct spending, Florida is listed at 3.37%.)

2. WOMEN NEED MORE RETIREMENT EDUCATION AND FEMALE ADVISERS TO HELP THEM SAVE: Employers should be concerned about their female employees’ confidence in their retirement savings, says a report from Employee Benefit Advisor.Incentivizing all employees, but especially women, should be a key talking point advisers bring to employer clients when discussing financial wellness. Whether it is providing food at a retirement savings seminar or gift cards for completing online trainings, these tactics work to make all employees show up to get retirement advice they need. Only three in ten financial advisers are women. While there is no direct correlation between women saving for retirement and the number of female advisers in the field, there are statistics that show it helps. For example, most widows switch advisers within a few years of their spouses’ death because they want to go to a woman who understands their issues. Only 30% of baby boomer women and 13% of Gen X women have high levels of confidence in accumulating sufficient savings to live comfortably throughout their retirement years. In addition, one in five boomer women and 35% of Gen X women have no savings at all! Women are gaining extensive increased empowerment in household finances. There is a little bit of optimism and it is devising empowerment of women. Sixty percent consider themselves the primary breadwinner, 49% have a great deal of responsibility for investment decisions, 57% handle major investments and 59% teach children about money. But there is still work to be done to bring empowerment back. Financial advisers help create a framework, both inside and outside the workplace.

3. SOCIAL SECURITY BENEFITS ARE PRIMARY SOURCE OF INCOME FOR HALF THE COUNTRY’S RETIREES!: According to, that statement sent a shock wave through many of the near and current boomers attending a seminar in California. Many were alerted that knowledge can help or hurt what income they get from those benefits. Social Security is the bedrock of retirement income planning for most people in the United States. But many do not realize there are better ways to determine their benefits amount; that choices they make early on will maximize or minimize those amounts; and that married couples have options that will increase their benefits. The first thing people do not realize is just how Social Security can add up. Those earning $2,000 a month now from Social Security could earn more than $300,000 if they live 10 more years. Twenty more years, and the figure jumps to $675,000. The dollar amount of benefits grows 2.8% each year to adjust to cost-of-living increases. With the adjustment, a $2,000 monthly benefit would grow to $2,600 in 10 years and $3,500 in 20 years. Many retirees or soon-to-be retirees ask whether Social Security will have money left for them. The trust fund supplying Social Security benefits was nearly $2.8 trillion at the end of 2013, up from $2.7 trillion a year before. The amount of benefits depends on several factors, but a person’s largest earnings averaged across 35 years and at what age the person applies to start taking benefits are two critical ones. Full retirement age varies by birth year, and while those born between 1943 and 1959 can receive full benefits before age 67, those born in 1960 or later must wait until age 67. A key point is the longer a person waits, the more money the recipient will get. Apply before reaching full retirement age, and you get only 70-or 75%, but that amount will increase yearly as the person approaches the federal retirement age. Waiting a year can increase payments by 8%, two years by 18%, the amount eventually caps out. Married couples have options that can mean greater monthly benefits. Spouses will get half of the primary worker’s benefits if taken at full retirement age. However, there is no “double-dipping”: spouses receive their own benefits or part of their spouse’s, whichever is more. Divorced couples are allowed portions of their former spouse’s Social Security benefits.

4. HOW LONG MUST NEW HIRES WORK TO GET PENSION BENEFITS?: It is going to be a long time before many younger state workers are able to reap the benefits of their pension systems. reports on a recent Urban Institute analysis that found employees hired at age 25 in half of traditional state and local systems must work 20 or more years to start receiving pension payments worth more than their contributions. For others, the wait extends 30 years or even longer. The recent rounds of pension reforms widened the time period before many participating employees can begin earning employer-financed benefits. The Urban Institute argues that, for those disproportionally affected, this situation is cause for concern. Retirement eligibility is typically based on a combination of a person’s age and years of service. In most systems, shorter-tenured workers' contributions help subsidize benefits of longtime employees. Many of these short-term workers actually lose money because the interest from their pension plans is less than they could earn by investing money on their own. Much of the reforms state legislatures passed in recent years raised contribution rates, while others increased retirement ages. Such adjustments pushed up the mber of years plan participants need to begin accumulating benefits from their employers. For the most part, younger workers incurred far greater benefit cuts than those nearing the end of their careers. The changes have prompted some public sector groups to warn that cuts could deter newcomers from entering public service. One analysis of retirement data showed pension reforms contributed to sizable increases in employee retirements in at least six states. How systems are structured varies across occupations. The Urban Institute found new age-25 teaching hires must work a median of 24 years before receiving employer-financed benefits. For police and fire hires, it is 18 years. Because of some plans’ design, employees could see drastic swings in retirement benefits over the course of only one or two years. Police and fire plans, in particular, have experienced retirement benefit spikes. As a result, employees run the risk of losing out if they need to move or change jobs for various reasons.

5. HOW ARE PENSIONS PROTECTED STATE-BY-STATE?: Over the last century, states have adopted the idea that pensions are a form of deferred compensation and, along with that change, have come certain protections. As part of an ongoing series, says pension both public and private started out as a worker’s perk -- a gratuity that could be amended or removed entirely at any time. But over the last century, that perception has given way in most states to the idea that pensions are a form of deferred compensation. Along with that change has come certain protections via either specifically in state constitutions or through a court interpretation of the constitution. Nearly all states have some kind of protection for pensions. Most (41) protect pensions under contract theory, which prohibits states from passing a law that impairs a contract, whether public or private. Some states (7) have a constitutional provision that specifically states that public pension plans create a contract between the state and participant (employee) although the protections vary state-to-state. Thirty-four of these contract-protected-states have court rulings that inferred intent to create such a contract, although when the protection starts and what it entails varies. A few states (6) take the approach that pensions are protected as a matter of property, which cannot be taken away without due process of law in accordance with the United States Constitution. Minnesota is the only state that protects pensions under the promissory estoppel theory: the protection of a promise even where no contract has been explicitly stated. And, lastly, Texas and Indiana still apply the gratuity approach to pensions. For a handy state-by-state map showing pension legal protections, visit

6. ADULT TRUTHS: There is great need for a sarcasm font.

7. TODAY IN HISTORY: In 1990, Dow Jones average hits a record 2,822.45.

8. 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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