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Cypen & Cypen
July 17, 2014

Stephen H. Cypen, Esq., Editor

1. IMPACT OF MANDATORY COVERAGE ON STATE AND LOCAL BUDGETS: Center for Retirement Research at Boston College has produced a white paper titled Impact of Mandatory Coverage on State and Local Budgets. The policy option of extending mandatory Social Security coverage to newly hired uncovered state and local workers is often included in packages to eliminate the program’s financing shortfall. The arguments for mandatory coverage go beyond financial considerations, though, as extending coverage would bring benefit protections that state and local workers currently lack and would improve equity by more broadly sharing the burden of Social Security’s legacy costs. The main argument against mandatory coverage is that it would raise costs to public employers and workers. The actual cost increase depends on the extent to which employers reduce their existing pensions when adopting Social Security. The paper estimates the costs under four different integration strategies: 1) no adjustment to existing pensions; 2) match the level of the first year benefit; 3) match the lifetime benefit; and 4) match the benefit to levels in neighboring states with Social Security coverage. The analysis was conducted for 22 state-administered plans in 13 states that were identified as lacking coverage. The results show that the cost of adding Social Security varies significantly, with the smallest increase for the match lifetime benefit option and the largest increase for the no adjustment option. Presenting the additional costs as a percent of payroll may exaggerate their burden on the employer, as the increases will likely be split between employer and employee. Perhaps a better way to gauge the size of the cost increase is as a share of a state’s budget; this measure shows that only a very modest impact. CRR WP 2014-9 (May 2014).
2. RISKS AND REWARDS OF PENSION OBLIGATION BONDS: We recently did a piece on pension obligation bonds (See C & C Newsletter for July 10, 2014, Item 1). Now, Gabriel Roeder Smith & Company has produced a very detailed and sophisticated piece on risks and rewards of pension obligation bonds. States and local governments continue to be interested in pension obligation bonds, due primarily to low interest rates, rising underfunded pension liabilities and shrinking revenues. POBs are financial investments, and, as such, involve both investment risks and investment rewards. A POB issued by a financially strong government following careful analysis of all the risks may be a part of a prudent long- term pension funding strategy. On the other hand, a POB issued by a financially weak government may lead to significant problems for the government and the pension fund. Further, context and balance are essential to understanding the nature of both risks and potential rewards of POBs. The report provides more clarity on both the potential risks and rewards inherent in issuing pension obligation bonds. POBs are not a silver bullet and will not, on their own, solve the challenge of pension funding and rising pension costs. In fact, if either the plan sponsor or the plan are having financial difficulties, it may be advisable to explore solutions that do not involve additional borrowing. Further, POBs are not a substitute for regular pension fund contributions made in accordance with a well thought out funding policy. However, POBs do represent one of several management tools that state and local governments may wish to consider to address pension funding. Of course the research report describes many of the risks involved in issuing POBs. But there are also benefits, primarily the potential for the transaction to produce net cost savings for the issuer. In addition, there are also less obvious benefits such as:

  • The potential for POB proceeds to provide a liquidity cushion, thus avoiding the need for a pension fund to liquidate long-term assets.
  • The positive message perceived by both active and retired plan members of an immediate increase in benefit security resulting from the inclusion of the POB proceeds into the pension fund.

The bottom line is that state and local governments need to analyze both the risks and rewards of POBs and determine if the upside potential is worth the downside risk. It is also important to keep in mind that an open discussion and full disclosure of all the issues raised will go a long way to getting all of the interested parties on the same page with respect to making a final determination on whether to issue POBs or not. Read the entire gem of a report at

3. TREASURY ISSUES FINAL RULES ON LONGEVITY ANNUITIES: U.S. Department of the Treasury and Internal Revenue Service have issued final rules regarding longevity annuities, which can help retirees manage their savings and ensure they have a stream of regular income throughout their advanced years. These regulations make longevity annuities accessible to the 401(k) and IRA markets, expanding availability of retirement income options as an increasing number of Americans reach retirement age. A longevity annuity is an income stream -- a kind of deferred income annuity -- that begins at an advanced age and continues throughout the individual’s life. This device can provide a cost effective solution for retirees willing to use part of their savings to protect against outliving the rest of their assets, and can also help them avoid overcompensating by unnecessarily limiting their spending in retirement. The final rules make longevity annuities accessible to 401(k)s and other employer-sponsored individual account plans and IRAs by amending the required minimum distribution regulations so that longevity annuity payments will not need to begin prematurely in order to comply with those regulations. The change will make it easier for retirees to consider using lifetime income options: instead of having to devote all of their account balance to annuities, retirees who wish to follow a combination strategy that uses a portion of their savings to purchase guaranteed income for life while retaining other savings in more liquid or flexible investments will be able to do so. Final rules expand upon proposed rules previously issued as part of a broader coordinated effort with the Department of Labor to encourage lifetime income, and enhance retirement security. The rules are largely consistent with the proposed regulations, but respond to public comments by expanding permitted longevity annuities in several respects, including:

  • Increasing the maximum permitted investment. Under the final rules, a 401(k) or similar plan, or IRA, may permit plan participants to use up to 25 percent of their account balance or (if less) $125,000 (up from $100,000 in the proposed regulations) to purchase a qualifying longevity annuity without concern about noncompliance with the age 70 1/2 minimum distribution requirements. The dollar limit will be adjusted for cost-of-living increases more frequently than under the proposed rules (in $10,000 increments instead of the $25,000 increments under the proposed rules for adjustment of the previous $100,000 limit).
  • Allowing “return of premium” death benefit. Under the final rules, a longevity annuity in a plan or IRA can provide that, if purchasing retirees die before (or after) the age when the annuity begins, the premiums they paid but have not yet received as annuity payments, will be returned to their accounts. This option may appeal to individuals seeking peace of mind that if they die before receiving the annuity, their initial investment can go to their heirs.  The proposed regulations had permitted a life annuity payable to a designated beneficiary after the annuity owner’s death, but not this type of “return of premium” upon death.


  • Protecting individuals against accidental payment of longevity annuity premiums exceeding the limits. The final rules permit individuals who inadvertently exceed the 25 percent or $125,000 limits on premium payments to correct the excess without disqualifying the annuity purchase.  
  • Providing more flexibility in issuing longevity annuities. The proposed regulations provided that a contract is not a qualifying longevity annuity contract unless it states, when issued, that it is intended to be one.  In response to comments, the final rules facilitate the issuance of longevity annuities by allowing the alternatives of including such a statement in an insurance certificate, rider, or endorsement relating to a contract.

T.D. 9673 (July 1, 2014).

4. COST OF LIVING RANKINGS: Two African cities top the list of most expensive cities for expatriates, according to Mercer’s 2014 Cost of Living Survey. Although not typically recognized as wealthy cities compared to others, Luanda in Angola is the world’s most expensive city for the second year in a row, followed by N’Djamena, Chad. European and Asian cities also continue to dominate as the costliest cities, with Hong Kong in third, followed by Singapore. Zürich jumped three places to rank fifth, followed by Geneva in sixth. Tokyo dropped four spots to rank seventh. Mercer's authoritative survey is one of the world’s most comprehensive, and is designed to help multinational companies and governments determine compensation allowances for their expatriate employees. New York is used as the base city, and all cities are compared against it. The survey covers 211 cities across five continents and measures the comparative cost of over 200 items in each location, including housing, transportation, food, clothing, household goods, and entertainment. Here are the top ten:

1. Luanda, Angola.

2. N’Djamena, Chad.

3. Hong Kong, Hong Kong.

4. Singapore, Singapore.

5. Zürich, Switzerland.

6. Geneva, Switzerland.

7. Tokyo, Japan.

8. Bern, Switzerland.

9. Moscow, Russia.

10. Shanghai, China.

At number 16 (up from 24), New York is highest ranked in the United States.

5. FLORIDA HAS SIX “DYNASTIES”: The Waltons, the Koch Family and McLean, Va.- based Mars Family are the three richest families in America according to Forbes’ new ranking of the richest families in America. Forbes said the three richest families are worth $301 billion, one-fourth of cumulative net worth of all the wealthiest families. Together the business magazine ranked 185 dynasties with fortunes of at least $1 billion. Collectively, the 185 families are worth $1.2 trillion. New York State has 26 such dynasties, while Texas has 20. Among other states, Pennsylvania has seven; Florida has six. America’s richest families, comprising multigenerationals of all sizes, were chosen from members of the Forbes 400, descendants of past or deceased Forbes 400 members, families behind the country’s biggest private companies and dynasties with dispersed fortunes. Here are America’s richest dynasties in Florida:

No. 52. Jenkins Family, net worth: $5.2 billion, based in Lakeland, Florida - source of wealth: Publix Super Markets.

No. 54. France Family, net worth: $5 billion, based in Daytona Beach, Florida - source of wealth: auto racing.

No, 54. Moran Family, net worth: $5 billion, based in Deerfield  Beach, Florida - source of wealth: Toyota distribution.

No. 58. Glazer Family, net worth: $4.4 billion, based in Palm Beach, Florida - source of wealth: sports teams, real estate.

No. 100. Collier Family, net worth: $2.3 billion, based in Naples, Florida - source of wealth: real estate.

No. 170. Lykes Family, net worth: $1.1 billion, based in Tampa, Florida - source of wealth: land, citrus groves.

6. MOST ENDANGERED JOBS: Travel agent, meter reader, newspaper reporter – they are all among CareerCast’s 2014 list of the 10 most endangered jobs, with the hiring outlook for mail carriers taking the highest hit with a projected 28% hiring decrease by 2020. The full list follows:

  • Mail Carrier: neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds --but nobody expected paperless communication would be the mail carrier’s downfall. As the highest-hit profession, the decline in postal jobs over the coming decade is expected to be severe.
  • Farmer: That is the T word again, technology, and as it advances, farmers are able to accomplish more with less -- particularly workers.  
  • Meter Reader: another technology terminated field, remote-viewing readers allow utility companies to compile data without sending workers to the field.  
  • Newspaper Reporter: along with other paper-specializing professions, newspaper reporters are falling to the wayside to make way for online writers and bloggers.  
  • Travel Agent: with self-serving options and online resources to arrange vacations, travel agents are focusing more on special trips that require additional preparations -- and their overall numbers are dwindling.  
  • Lumberjack: another victim to technology, the logging industry is requiring fewer lumberjacks. And, with less wood pulp needed for paper-based product, demand in the industry is falling.  
  • Flight Attendant: airline cutbacks and mergers have put the industry in a steady flux, and the longer-term hiring projections for flight attendants does not look like it is cleared for takeoff.  
  • Drill-Press Operator: with a continued gridlock on manufacturing hiring, dovetailed with technological advances, the job market for drill-press operators seems rather bleak.  
  • Printing Worker: in the digital world, less work is done on paper, translating to fewer jobs for hard-copy printing employees.  
  • Tax Examiner/Collector: much like other careers on the list, tax examiners and collectors' work is streamlined through technology, allowing employers to hire for fewer positions.

See related item 7 below.

7. TEN THINGS THAT WILL DISAPPEAR IN OUR LIFETIME: The following is from an unknown source, but it is hard to argue with the logic. Whether these changes are good or bad depends on how we adapt to them. But, ready or not, here they come (or go):

  • The Post Office. Get ready to imagine a world without the post office. The post office is so deeply in financial trouble that there is probably no way to sustain it in the long term.
  • The Check. Great Britain is already laying groundwork to do away with check by 2018. It costs the financial system billions of dollars a year to process checks. Plastic cards and online transactions will lead to the eventual demise of the check.  
  • The Newspaper. Younger people simply do not read the newspaper. They certainly do not subscribe to a daily delivered print edition. Newspaper delivery may go the way of the milkman and the laundry man. As for reading the paper online, get ready to pay for it. The rise in mobile Internet devices and e-readers has caused all the newspaper and magazine publishers to form an alliance to develop a model for paid subscription services.  
  • The Book. You say you will never give up the physical book that you hold in your hand, and turn the literal pages. People said the same thing about downloading music from iTunes. People quickly changed their minds when they discovered that I could get albums for half the price without ever leaving home. The same thing will happen with books. You can browse a bookstore online and even read a preview chapter before you buy. And the price is less than half that of a real book.  
  • The Land Line. Unless you have a large family and make a lot of local calls, you do not need it anymore. Most people keep it simply because they have always had it.  But you are paying double charges for that extra service. All cell phone companies will let you call customers using the same cell provider for no charge against your minutes.  
  • Music. This one may be the saddest part of all: the music industry is dying a slow death. There is a lack of innovative new music being given a chance to get to the people who would like to hear it.  The problem is greed and corruption. Record labels and radio conglomerates are simply self-destructing. Much of the music purchased today is "catalogue items," meaning traditional music that the public is familiar with.  
  • Television Revenues. Network revenues are down dramatically, and not just because of the economy. People are watching TV and movies streamed from their computers.  And they're playing games and doing lots of other things that take up the time that used to be spent watching television. Prime time shows have degenerated down to lower than the lowest common denominator. Cable rates are skyrocketing and commercials run about every 4 minutes and 30 seconds.  
  • The "Things" That You Own. Many of the very possessions we used to own are still in our lives, but we may not actually own them in the future.  They may simply reside in the “cloud."  With the latest “cloud services,” when you turn on your computer the Internet will be built into the operating system. You click on an icon, it will open something in the Internet cloud. If you save something, it will be saved to the cloud. And you may pay a monthly subscription fee to the cloud provider. But, will you actually own any of this "stuff" or will it all be able to disappear at any moment in a big puff of smoke? Will most of the things in our lives become disposable? Quick -- run to the closet and pull out that old photo album. 
  • Cursive Writing.  “Joined handwriting” is no longer taught in some schools because everything is done now on computers or keyboards.  (Come to think of it, why are two different ways to write?).  
  • Privacy. If there ever was a concept that we can look back on nostalgically, it would be privacy. It has been gone for a long time, anyway. There are cameras on the street, in most buildings, and even built into your computer and cell phone. "They" know who you are and where you are, right down to GPS coordinates. If you buy something, your habit will be put into a zillion profiles, and your ads will change to reflect those habits. "They" will try to get you to buy something else.  
  • Lousy Newsletters and Blogs. [Just kidding.] 

8. WHY TEACHERS DRINK: Q. What is a terminal illness?  A. When you are sick at the airport.

9. TODAY IN HISTORY: In 1948, Israeli army captures Nazareth.

10. 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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