1. FLORIDA CIRCUIT JUDGE DECLARES PROHIBITION ON SAME-SEX COUPLES FROM MARRYING IN FLORIDA VIOLATES DUE PROCESSING AND EQUAL PROTECTION CLAUSES OF U.S. CONSTITUTION: Miami-Dade County, Florida, Circuit Court Judge Sarah Zabel has granted plaintiffs’ motion for summary judgment in a case involving Florida’s prohibition on marriage of same-sex couples. The following language, set forth in the United States Supreme Court almost fifty years ago, in Loving v. Virginia, applies equally to the instant case, when references to race are removed:
To deny this fundamental freedom on so unsupportable a basis as the . . . classifications embodied in these statutes, classifications so directly subversive of the principle of equality at the heart of the Fourteenth Amendment, is surely to deprive the state's citizens of liberty without due process of law. The Fourteenth Amendment requires that the freedom of choice to marry not be restricted by invidious . . . discriminations.
Loving was not cited once in the State's brief, and it was disingenuous of it to ignore this seminal case rather than attempting to distinguish it. Nevertheless, the court finds that the only distinction between Lovingand the instant case is the instant case deals with laws that deny the fundamental freedom to marry based on people's sexual orientation rather than their race. Because this denial is the denial of a fundamental right, it would have to be narrowly tailored to serve a compelling governmental interest in order to be valid. The statutes and constitutional amendment at issue do not meet this standard, and they do not meet the rational basis standard, which only requires them to be rationally related to legitimate governmental interest. Thus, the Court finds that Florida's statutory and constitutional restrictions on same-sex marriage violate the Due Process and Equal Protection Clauses of the United States Constitution. They improperly infringe upon plaintiffs' ability to exercise their fundamental right to marry the person of their choice, and upon their liberty interests regarding personal autonomy, family integrity, association, and dignity. They also unlawfully discriminate on the basis of sexual orientation. Pareto v. Ruvin, 21 Fla. L. Weekly Supp. 899 (Fla. 11th Cir. July 25, 2014) (Appeal pending); (stayed pending appeal). See also, In Re: Marriage Of: Heather Brassner, Fla. L. Weekly Supp. (Fla. 17th Cir. August 4, 2014); Huntsman v. Heavilin, 21 Fla. L. Weekly Supp. 916 (Fla. 16th Judicial Cir. July 17, 2014); and In Re Estate Of, Frank C. Bangor, Fla. L. Weekly Supp. (Fla. 15th Cir. August 5, 2014), (non-resident whose surviving spouse of same-sex marriage legal under state of Delaware, and who was named as personal representative of decedent’s will, was qualified to serve as personal representative in Florida.)
2. HOW TO UNDERSTAND THE SOCIAL SECURITY TRUST FUNDS: Center on Budget and Policy Priorities has issued a very informative piece on understanding the Social Security trust funds. Few budgetary concepts generate as much unintended confusion and deliberate misinformation as the Social Security trust funds. Political candidates of both parties accuse their opponents of raiding the trust funds. Some writers disparage the trust funds as funny money, IOUs or a fiction. All these claims are nonsense. In fact, the Social Security trust funds are invested in Treasury securities that are every bit as sound as the U.S. government securities held by investors around the globe; investors regard those securities as being among the world’s very safest investments. The paper provides some basic information about the Social Security trust funds. Social Security’s financial operations are handled through two federal trust funds -- the Old-Age and Survivors Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund. Although legally distinct, they are often referred to collectively as the Social Security trust fund. All of Social Security’s payroll taxes and other earmarked income is deposited in the trust funds, and all of Social Security’s benefits and administrative expenses are paid from the trust funds. In years when Social Security collects more in payroll taxes and other income than it pays in benefits and other expenses -- as it has each year since 1984 -- the Treasury invests the surplus in interest-bearing Treasury bonds and other Treasury securities. Social Security can redeem these bonds whenever needed to pay benefits. The balances in the trust funds thus provide legal authority to pay Social Security benefits when the Social Security program’s current income is insufficient by itself. Social Security is adequately financed in the short term, but faces a modest long-term financial shortfall amounting to 1.0% of gross domestic product over the next 75 years, the period that the program’s actuaries use in evaluating the program’s long-term finances. Social Security has run a surplus in every year since 1984, as was anticipated when Congress enacted and President Reagan signed legislation based on the recommendations of the Greenspan Commission in 1983. Authors of the 1983 legislation purposely designed program financing in this manner to help prefund some of the costs of the baby boomers’ retirement. Under current projections, the combined Social Security trust funds will continue to run annual surpluses until 2020. The interest income that the trust funds earn on their bonds, as well as the proceeds the trust funds will receive when their bonds are redeemed, will enable Social Security to keep paying full benefits until 2033. In 2033, the combined trust funds are projected to run out of Treasury bonds to cash. At that point, if nothing else is done, Social Security could still pay more than three-quarters of its scheduled benefits using its annual income. Contrary to a common misunderstanding, benefits would not stop. Of course, paying three quarters of promised benefits is not an acceptable way to run the program, and Congress should take action well before 2033 to restore long-term solvency of the program. The Social Security trust funds are invested entirely in U.S. Treasury securities. Like the Treasury bills, notes, and bonds purchased by private investors around the world, the Treasury securities that the trust funds hold are backed by the full faith and credit of the U.S. government. The U.S. government has never defaulted on its obligations, and investors consider U.S. government securities to be one of the world’s safest investments. Treasury securities held by the trust funds do have some special features that make them even more attractive investments than other Treasury securities. First, the trust funds’ investments do not fluctuate in value, and can always be redeemed at par. Even if the securities must be redeemed early, Social Security is guaranteed not to lose money on its investment. Second, all the securities purchased by the trust funds, even short-term securities that will mature in one or two years, earn interest at the same rate as medium- and long-term Treasury securities (those not due or callable for at least four years). Trust funds had accumulated nearly $2.8 trillion worth of Treasury securities, earning an average interest rate of 3.8% during that year. The annual report of Social Security’s board of trustees lists the specific securities owned by the trust funds, their maturities, and interest rates. Trustees project that the trust funds will earn $99 billion in interest income in 2014. The federal government is not raiding the trust funds. Some critics have suggested that the lending of Social Security trust fund reserves to the Treasury represents a misuse of those funds. This view reflects a misunderstanding of how the Treasury manages the federal government’s finances. When the rest of the budget is in deficit, a Social Security cash surplus allows the government to borrow less from the public to finance the deficit. Money that the federal government borrows from the public or from Social Security is used to finance the ongoing operations of the government in the same way that money deposited in a bank is used to finance spending by consumers and businesses. The bank depositor will get his money back when needed, and so will the Social Security trust funds. Investing the trust funds in other financial assets would not change the situation. Although some people have argued that the Social Security trust funds would be more real if they were invested in private stocks or bonds, there is nothing to this contention. If there were no change in the total federal budget deficit, such a policy would merely rearrange the holding of assets in the economy, would not change the net financial situation of Social Security, the federal government as a whole, or the private sector. The trust fund debt is real even though it is not part of debt held by the public. Budget experts generally focus on debt held by the public -- which reflects what the government must borrow in private credit markets and which excludes trust fund holdings -- as the most useful measure of federal debt for economic analysis. Some have argued that it is inconsistent to adopt that focus while simultaneously viewing the debt held by Social Security as real. This argument is incorrect: both measures of debt are important, but they measure different things. Debt held by the public is a measure of the federal government’s overall fiscal health. It represents money that must be borrowed and periodically refinanced in private credit markets; interest payments on that debt represent a current drain on government resources. Debt held by Social Security, by contrast, provides information about the adequacy of the program’s dedicated financing. Debt held by trust funds does not have the same broader economic significance as debt held by the public. Since it does not need to be financed in private credit markets, it cannot lead to a refinancing crisis. For a detailed paper on Social Security trust funds investment practices see the August 20, 2014 report from Congressional Research Service, 7-5700, RS 20607.
3. WHAT IS MISSING IN SOCIAL SECURITY REPORT?: The trustees of the Social Security system decided to eliminate any mention of replacement rates in the 2014 Trustees Report (see C & C Newsletter for July 31, 2014, Item 7). The document provides an annual update on the system’s finances in the short run and over a 75-year horizon. The absence of such information has serious policy implications. Earlier reports had included historical and projected replacement rates at age 65 and at the so called Full Retirement Age for workers at different earnings levels. This information is crucial for, among other things, assessing impact of the increase in the FRA. As a result of legislation enacted in 1983, the age at which workers receive full benefits is moving from 65 to 67. This change in the FRA sounds harmless, but it is equivalent to an across-the-board benefit cut. The cut comes in one of two forms. Those who delay claiming from 65 to 67 will receive two fewer years of benefits. Those who continue to claim at 65 will receive actuarially reduced amounts to reflect the two additional years of benefits. (The goal of the actuarial reduction is to ensure that, for the worker with average life expectancy, lifetime benefits are equivalent regardless of when they are claimed between 62 and 70.) In terms of retirement security, the 65-year-old is worse off than before the increase in the FRA. As a result of the actuarial reduction for what becomes “early” claiming, the replacement rate for the medium earner drops from 42% in 2003, the first year of FRA increase, to 36% in 2030, once the 2-year increase in FRA is fully phased in. Commensurate cuts occur for workers at all levels on the earnings scale. The challenge for analysts and policymakers is that these data are no longer available in the Trustees Report. The main argument of the critics who advocated the deletion of this information is that replacement rates reported by Social Security were too low, because they were based on career earnings adjusted for wage growth. But a recent study showed that calculating replacement rates using the last five years of significant earnings before retirement produced very similar numbers. The whole purpose of the attack on Social Security replacement rates is an attempt to provide a rationale for cutting benefits. If Social Security replacement rates are really as high as critics allege, then they would be ripe for reduction. But before we get lost in the intricacies of replacement rate calculations, remember that the average benefit in 2013 was $1,270 per month, about $15,240 per year. No one disputes this number. The whole argument is about by what measure of earnings this benefit should be divided. This piece is from Alicia H. Munnell in MarketWatch.
4. U.S. 30-YEAR BONDS OUTPERFORM STOCKS IN 2014:According to onwallstreet, treasury 30-year bonds have returned more than double that in U.S. stocks this year before the government’s monthly sale of $16 billion of its longest maturity on August 5, 2014. Long bonds advanced 16% in 2014. Standard & Poor’s 500 Index gained 6.7%, including reinvested dividends. As the year progressed, a lot of flattening trades have been put on in anticipation of Federal Reserve’s raising interest rates sooner than investors expected. Longer-dated bonds have also benefited from a combination of trades out of inside bond classes and flight to safety. A flattening trade is a bet longer-dated yields will fall faster than those on securities with shorter maturities. Thirty-year yields are expected to rise to 3.5% by year-end and 10-year rates to 2.7%, as long as there is no derailment of the U.S. recovery.
5. COURT DENIES CLAIMS OF INVESTORS IN MADOFF FEEDER FUNDS: Some of the victims of Bernard L. Madoff Investment Securities LLC Ponzi scheme did not invest directly with Madoff. Instead, they invested in funds, sometimes called feeder funds, and the feeder funds then invested some or all of their assets with Madoff. Despite the absence of a direct relationship with Madoff, many of the feeder fund investors have submitted claims as “customers” to the trustee for Securities Investor Protection Act liquidation of Madoff. The trustee sought an order affirming his determination to disallow 308 claims filed by claimants who invested in four benefit plans that were regulated under the Employee Retirement Income Security Act of 1974. Each of the plans, in turn, invested with Madoff. The United States Bankruptcy Judge affirmed trustee’s determination to disallow the claims. The claimants are not “customers” of Madoff within the meaning of SIPA. Customer status confers a significant benefit because the Securities Investor Protection Corporation will advance up to $500,000 to each customer to the extent that the customer’s net equity claim exceeds its ratable share of customer property. If debtor is insolvent, the SIPC advance may be the only means of recovering an investment. Not every victim of a broker-dealer’s fraud is a “customer.” When the feeder fund dispute first arose, the bankruptcy court carved out the question of whether ERISA affects determination of the customer issue under SIPA. ERISA funds are similar to feeder funds because the participant invests in a plan that invests some or all of the plan’s assets with a broker-dealer, here Madoff. Securities Investor Protection Corporation v. Bernard L. Madoff Investment Securities, LLC., Case Nos. 08-01789 and 09-11893 (Bannkr. S.D.N.Y. August 22, 2014).
6. 2014 RETIREMENT CONFIDENCE SURVEY OF THE STATE AND LOCAL GOVERNMENT WORKFORCE: A joint report of the TIAA-CREF Institute and Center for State and Local Government Excellence analyzes data from a recent survey initiative that examined the employment and retirement planning/saving experiences of state and local government workers, as well as their confidence in their retirement income prospects. One-third of public sector employees have been with their current employer for less than 10 years, and one-third for 20 years or longer. When considering the future, two-thirds do not expect to leave their current employer anytime soon. Respondents ranked job security, health insurance, retirement benefits, and salary as the most important job elements they would consider in deciding whether to switch employers. The vast majority of state and local employees are covered by a primary defined benefit pension plan, and expect to receive retiree health care benefits; one-quarter of these workers reported changes to these benefits over the past two years and one-quarter expect (more) changes in the next two years. The typical state and local employee would like to retire at age 61, but expects to retire at 64; one-half expect to work for pay in retirement. Most public servants do not know how much they need to save for a comfortable retirement, and they have not planned and saved specifically for medical expenses in retirement. About 40% of state and local workers are very confident that they will receive all of the retirement plan benefits they have earned, one-half are somewhat confident, and the rest are not confident. The analogous figures for retiree health care benefits are one-quarter and 60%, respectively. State and local workers’ confidence in future Social Security and Medicare benefits is lower. On a more personal level, about 20% of state and local workers are very confident that they are saving and investing appropriately for retirement, with an additional 50% or more somewhat confident in their savings and investing. (Boy, are they going to be surprised.)
7. GLOBAL SURVEY OF DEFINED BENEFIT PLANS’ ASSUMPTIONS: Towers Watson has issued its twenty fifth edition of its Global Survey of Accounting Assumptions for DB Plans. We summarize only two: inflation and expected rates of return. The assumption for long-term price inflation influences other economic assumptions such as rate of salary increases, rate of increase in pensions (both in deferment and in payment) and rate of increase in the social security parameters reflected in the pension benefit formula. Since inflation is a long-term assumption, as expected, there is little year-to-year movement. Here are some averages:
Canada 2.12% 2.16%
Germany 1.95% 1.97%
Japan 1.05% 1.05%
Netherlands 1.99% 1.99%
Switzerland 1.42% 1.42%
United Kingdom 3.32% 2.88%
United States 2.59% 2.59%
The rate of return on assets is the long-term expectation of the annual earnings rate of the pension fund. Expected rates of return reflect the plan sponsor’s outlook while considering the plan’s asset allocation. The following chart shows expected rates of return averages:
Canada 6.13% 6.14%
Germany 4.35% 4.32%
Japan 2.27% 2.42%
Netherlands 3.88% 4.08%
Switzerland 3.34% 3.44%
United Kingdom 6.13% 6.11%
United States 7.12% 7.19%
As expected, the plans in countries with higher equity allocations are those with well-established domestic stock markets. For instance, companies in Canada, the U.K. and U.S. on average, hold large equity positions: (Canada 50%, the U.K. 40% and the U.S. 52% as opposed to the Netherlands 15%, Germany 20% and Switzerland 22%.) Towers Watson surveyed 1,025 companies from 44 countries. Very interesting.
8. INTERESTING FACTS: Kites were used in the American Civil War to deliver letters and newspapers.
9. TODAY IN HISTORY: In 1924, Georgian opposition stages the August Uprising against the Soviet Union. (The more things change, the more they stay the same.)
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