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Miami

Cypen & Cypen
NEWSLETTER
for
June 13, 2013

Stephen H. Cypen, Esq., Editor

1. BNY MELLON PENSION SUMMARY:  BNY Mellon has issued its Pension Summary for May 2013:
 
•         Assets outperformed liabilities over the month, leading to a 5.6 percentage point increase in funded status for the typical pension plan.
•         Asset return for the moderate risk portfolio was 0.2% in May; the typical liability return was -6.3%.
•         US equity markets rose for the seventh consecutive month, returning 2.4% in May.
 
2. 2013 INCOME STUDY IS BAD NEWS FOR MOST AMERICANS:  The rule of thumb among financial experts is that you need about 70% of your pre-retirement income once you quit working if you wish to enjoy a comfortable lifestyle. Yet, there are only two states, Hawaii and Nevada, where households of those 65-and-over are making at least 70% of the income earned by households between 45 and 64 years of age, according to an analysis of Census Bureau data reported by interest.com.  In the vast majority of states, retired households earn just 50% to 60% of the income of those in the age group immediately below them.  Nationally, these older Americans have incomes that average just 57% of those aged 45-to-64, far below the replacement level suggested by financial planners and other experts.  Here is the median income for the pre- and post-retirement cohorts based on Census Bureau data for Florida.  The “replacement” percentage is based on those income numbers, how much it had changed since 2005 and the percent of households led by someone 65-and-over:  
 
Median income            Median income      Replacement       Increase from    Percent of
(45 to 64)                  (65 and over)               income                2005                households
                                                                                            (in % points)                 65+
  $52,183                       $34,892                    66.86%                  8.04                  27.90%
 
Not surprisingly, that Florida’s 27.90% of households 65-and-over is highest in the country. 
 
3.  IMPLICATIONS OF LONG-TERM PAY FREEZES FOR STATES, LOCALITIES:  When Florida state employees receive an approved pay increase later this year, it will be the first raise for most in seven years, reports governing.com.  In Philadelphia, city workers have not seen a general pay increase since 2007. New Mexico state workers are slated to get a meager 1% pay increase this summer, their first across-the-board raise in four years. They are not alone: numerous state and local governments enacted pay freezes while budgets were trimmed during the Great Recession, with some still in place. The implications of these long-term pay freezes have been far-reaching, from hindering employee retention to hurting morale. Public employees in some jurisdictions are just now getting their first raise in years. But for a sizable share of the sector, pay freezes continue to persist. A recent survey of senior state and local officials found that 42% of them had pay freezes during the past year. Similarly, 33% of International Public Management Association for Human Resources members reported pay freezes in another survey published in May.  With an uneven recovery, the extent to which money has flowed back into municipal coffers varies, so some workers are waiting longer for a raise than others. Those areas hit hardest by the recession may not be able to afford the added expense. Some governments with the largest deficits are even imposing salary reductions, such as the 10-percent pay cuts imposed by the city of San Jose, California, a few years back. In some cases, extended pay freezes led to an odd disparity: front line union workers making more money than their managers. Before this year, approximately 13,000 non-union Pennsylvania state employees had not seen a general pay raise since 2008. Over the same time, net pay for union employees climbed 12.75%, which led to union members’ salaries often surpassing those of management. About a quarter of non-union managers were supervising at least one union employee receiving a higher paycheck earlier this year.  The budget difficulties that led to the pay freezes in the first place have not entirely abated. Although many governments could not approve across-the-board salary increases, some agencies found ways to boost pay or at least deliver cost-of-living increases. Other employees earned salary bumps based on merit. More states and localities could have provided broad across-the-board pay increases in recent years, but elected officials lack the political will to deliver.  There is a sense of government workers still being fat cats.  When coupled with this anti-government mentality, it becomes tough to raise salaries.  So, what else is new? 
 

4. STATUS OF THE SOCIAL SECURITY AND MEDICARE PROGRAMS:    Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs.  The following summarizes the 2013 Annual Reports.  Neither Medicare nor Social Security can sustain projected long-run programs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers. If lawmakers take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits. Social Security and Medicare together accounted for 38 percent of federal expenditures in fiscal year 2012. Both programs will experience cost growth substantially in excess of GDP growth through the mid-2030s due to rapid population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment and, in the case of Medicare, to growth in expenditures per beneficiary exceeding growth in per capita GDP. In later years, projected costs expressed as a share of GDP trend up slowly for Medicare and are relatively flat for Social Security, reflecting very gradual population aging caused by increasing longevity and slower growth in per-beneficiary health care costs.

  • Social Security  


Social Security’s total expenditures have exceeded non-interest income of its combined trust funds since 2010, and the Trustees estimate that Social Security cost will exceed non-interest income throughout the 75-year projection period. The deficit of non-interest income relative to cost was about $49 billion in 2010, $45 billion in 2011, and $55 billion in 2012. The Trustees project that this cash-flow deficit will average about $75 billion between 2013 and 2018 before rising steeply as income growth slows to the sustainable trend rate after the economic recovery is complete and the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Redemption of trust fund asset reserves by the General Fund of the Treasury will provide the resources needed to offset Social Security’s annual aggregate cash-flow deficits. Since the cash-flow deficit will be less than interest earnings through 2020, reserves of the combined trust funds measured in current dollars will continue to grow, but not by enough to prevent the ratio of reserves to one year’s projected cost (the combined trust fund ratio) from declining. (This ratio peaked in 2008, declined through 2012, and is expected to decline steadily in future years.) After 2020, Treasury will redeem trust fund asset reserves to the extent that program cost exceeds tax revenue and interest earnings until depletion of total trust fund reserves in 2033, the same year projected in last year’s Trustees Report. Thereafter, tax income would be sufficient to pay about three-quarters of scheduled benefits through 2087.  A temporary reduction in the Social Security payroll tax rate in 2011 and 2012 reduced payroll tax revenues by an estimated $222 billion in total. The legislation establishing the payroll tax reduction also provided for transfers from the General Fund to the trust funds in order to “replicate to the extent possible” payments that would have occurred if the payroll tax reduction had not been enacted. Those General Fund reimbursements amounted to about 15 percent of the program’s non-interest income in 2011 and 2012. The temporary payroll tax reduction expired at the end of 2012. Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable earnings will grow rapidly from 11.3 percent in 2007, the last pre-recession year, to roughly 17.0 percent in 2037, and will then decline slightly before slowly increasing after 2050. Cost displays a slightly different pattern when expressed as a share of GDP. Program cost equaled 4.2 percent of GDP in 2007, the last pre-recession year, and the Trustees project that cost will increase to 6.2 percent of GDP for 2036, then decline to about 6.0 percent of GDP by 2050, and thereafter rise slowly reaching 6.2 percent by 2087.  The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds is 2.72 percent of taxable payroll, up from 2.67 percent projected in last year’s report. This deficit amounts to 21 percent of program non-interest income or 17 percent of program cost. A 0.06 percentage point increase in the OASDI actuarial deficit would have been expected if nothing had changed other than the one-year extension of the valuation period to 2087. The effects of recently enacted legislation, updated demographic data, updated economic data and assumptions further worsened the actuarial deficit, but these effects were completely offset by the favorable effects of updated programmatic data and improved methodologies.  While the combined OASDI program fails the long-range test of close actuarial balance, it does satisfy the test for short-range (ten-year) financial adequacy. The Trustees project that the combined trust fund asset reserves at the beginning of each year will exceed that year’s projected cost through 2027.

  • Medicare 
     

The Trustees project that the Medicare Hospital Insurance (HI) Trust Fund will be the next to face depletion after the DI Trust Fund. The projected date of HI Trust Fund depletion is 2026, two years later than projected in last year’s report, at which time dedicated revenues would be sufficient to pay 87 percent of HI cost. The Trustees project that the share of HI cost that can be financed with HI dedicated revenues will decline slowly to 71 percent in 2047, and then rise slowly until it reaches 73 percent in 2087. As it has since 2008, the HI Trust Fund will pay out more in hospital benefits and other expenditures than it receives in income in all years until reserve depletion. The projected HI Trust Fund’s long-term actuarial imbalance is smaller than that of the combined Social Security trust funds under the assumptions employed in this report. The estimated 75-year actuarial deficit in the HI Trust Fund is 1.11 percent of taxable payroll, down from 1.35 percent projected in last year’s report. The HI fund again fails the test of short-range financial adequacy, as its trust fund ratio is already below 100 percent and is expected to decline continuously until reserve depletion in 2026. The fund also continues to fail the long-range test of close actuarial balance. The HI 75-year actuarial imbalance amounts to 29 percent of tax receipts or 23 percent of program cost. The modest improvement in the outlook for HI long-term finances is principally due to: (i) lower projected spending for most HI service categories especially for skilled nursing facilities to reflect lower-than-expected spending in 2012 and other recent data; (ii) lower projected Medicare Advantage program costs that reflect recent data suggesting that certain provisions of the Affordable Care Act will reduce growth in these costs by more than was previously projected; and (iii) a refinement in projection methods that reduces assumed per beneficiary cost growth during the transition period between the short-range projections and the long-range projections. Partially offsetting these favorable changes to the projections are somewhat lower projected levels of tax income that reflect lower-than-expected tax income in 2012. The Trustees project that Part B of Supplementary Medical Insurance (SMI), which pays doctors’ bills and other outpatient expenses, and Part D of SMI, which provides access to prescription drug coverage, will remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs. However, the aging population and rising health care costs cause SMI projected costs to grow steadily from 2.0 percent of GDP in 2012 to approximately 3.3 percent of GDP in 2035, and then more slowly to 4.0 percent of GDP by 2087. General revenues will finance roughly three quarters of these costs, and premiums paid by beneficiaries almost all of the remaining quarter. SMI also receives a small amount of financing from special payments by States and from fees on manufacturers and importers of brand-name prescription drugs. Projected costs for Part B assume an almost 25-percent reduction in Medicare payment rates for physician services will be implemented in 2014 as required by current law, which is highly unlikely. The Trustees project that total Medicare cost (including both HI and SMI expenditures) will grow from approximately 3.6 percent of GDP in 2012 to 5.6 percent of GDP by 2035, and will increase gradually thereafter to about 6.5 percent of GDP by 2087.  The drawdown of Social Security and HI Trust Fund reserves and the general revenue transfers into SMI will result in mounting pressure on the Federal budget. In fact, pressure is already evident. For the seventh consecutive year, the Social Security Act requires that the Trustees issue a “Medicare funding warning” because projected non-dedicated sources of revenues primarily general revenues are expected to continue to account for more than 45 percent of Medicare’s outlays in 2013, a threshold breached for the first time in fiscal year 2010. 

  • Conclusion

 
Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will leave more options and more time available to phase in changes so that the public has adequate time to prepare.
 
5.       FPPTA 29TH ANNUAL CONFERENCE: The Florida Public Pension Trustees Association’s 29th Annual Conference will take place on June 23-26, 2013 at the Omni Orlando Resort at ChampionsGate.  A link on FPPTA’s web site, www.fppta.org , will take you to the Omni Orlando Resort at ChampionsGate site to make your room reservations.  You may access information and updates about the conference at FPPTA’s website.  All police officer and firefighter plan participants, board of trustee members, plan sponsors and anyone interested in the administration and operation of the Chapters 175 and 185 pension plans should take advantage of this Conference. 
 
6.       WHEN INSULTS HAD CLASS: He loves nature in spite of what it did to him.  Forrest Tucker

7.       PHILOSOPHY OF AMBIGUITY:  If you try to fail, and succeed, which have you done?
 
8.       ON THIS DAY IN HISTORY: In 1967, Thurgood Marshall nominated as 1st black Supreme Court justice.
 
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. 
 
10.     PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription.  Many pension board administrators provide hard copies in their meeting agenda.  Other administrators forward the newsletter electronically to trustees.  In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at http://www.cypen.com/subscribe.htm .

 

 

 

 

 

 

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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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