IRS RELEASES PENSION PLAN LIMITATIONS FOR 2006:
On October 14, 2005
Internal Revenue Service issued IR-2005-120, announcing cost-of-living
adjustments applicable to dollar limitations for pension plans and
other items for tax year 2006. Effective January 1, 2006, the limitation
on annual benefits of a defined benefit plan under Section 415 is
increased from $170,000 to $175,000. Similarly, the limitation for
plans under Section 415 is increased from $42,000 to $44,000. And
annual compensation limit under Section 401(a)(17) is increased from
to $220,000. Finally, the limitation on deferrals under Section 457
deferred compensation plans of state and local governments is increased
from $14,000 to $15,000. This year is the last one for Economic Growth
and Tax Relief Reconciliation Act of 2001 prescribed annual increases
in Section 457 plan limits. For 2007, like the other items listed
above, there will be adjustments only if inflation produces an amount
to reach the next increment.
2. SOCIAL SECURITY WILL RISE 4.1%!:
Americans who receive Social Security will see a 4.1% boost (about
$35.00, on average) in
their monthly checks next year. Up from a 2.7% increase last year,
the latest increase is the largest since 1991. The increase will
first apply to December 2005 benefits payable in January 2006. For
Survivors and Disability Insurance, the payroll tax rate will remain
at 6.2% up to the Social Security taxable wage base (which will increase
from $90,000 to $94,200). The Medicare Part A tax of 1.45% will continue
to apply on all wages in 2006.
3. TOP TEN MYTHS OF SOCIAL SECURITY REFORM:
The Center for Retirement
Research at Boston College has published a lengthy (and, surprisingly,
piece entitled “Top Ten Myths of Social Security Reform.” (Unlike
myths of Social Security itself, these myths relate strictly to Social Security
reform.) By way of introduction, the U.S. Social Security system has been
one of the most successful public policy programs in our nation’s history.
Established during the Great Depression, benefits provided through Social
Security have helped to prevent poverty among millions of Americans after
during periods of disability or after death of a family breadwinner. Unfortunately,
the pay-as-you-go financial structure of the system is not well designed
to handle the substantial demographic changes underway in the United States.
by the Office of the Chief Actuary of the Social Security Administration
indicate that the existing combination of scheduled taxes and scheduled benefits
an $11 Trillion hole in the system over an infinite time horizon. As a result,
the only way that Social Security can continue to pay currently-scheduled
benefits to future generations is to impose an ever-larger tax burden on
Here are the myths and a short explanation about each:
1: Social Security is financially sound for “decades to
come.” Real economic and fiscal pressure arises
from the collision of demographic change and the pay-as-you-go
financial structure as
early as the year 2008, when as a result of the Baby Boomers starting
to claim benefits, Social Security’s cash flow surpluses
will begin to decline.
Myth 2: Economic Growth Will Eliminate the Existing Problem.
To avoid making politically difficult policy corrections based on
the fact that
the future might turn out better than expected is unwise. Rather
than using the existence of uncertainty as an excuse to avoid responsible
policy actions, policymakers should look for ways to reform the
Security system so that it is more resilient to unexpected demographic
and economic shocks.
Myth 3: Social Security is in “Crisis” and Will Not Be
There When Today’s Younger Workers Retire. Under intermediate
assumptions of the Social Security Trustees, even if policymakers
make no changes in the system and Social Security is unable to pay
benefits after the Trust Fund is exhausted, future retirees will
still get approximately three-quarters of what is scheduled under
law. So the question facing today’s younger workers should not
be “Will I get anything out of Social Security?” but rather “Just
how much will I receive when I retire, and how much will I have to
pay in taxes before I get there?” And, as part of the current
debate, “Will I be permitted to invest part of my contributions
in personal accounts?”
Myth 4: Personal Accounts Can Save Social
Security without Benefit Cuts or Tax Increases. Although
there may be sound economic reasons to support a move to personal
accounts, none of the advantages in any
way obviate the need for other reforms that reduce long-term expenditures
or increase the long-run revenue stream dedicated to Social Security.
Myth 5: Allowing Individuals to Redirect Their
Contributions from the Trust Fund to Personal Accounts Will Provide
a Higher Rate of Return.
Advocates of personal accounts correctly say that investing in stocks
can provide a higher expected return than bonds, so long as they
acknowledge the increased risk that comes along as part of the
a comparison of stock market rates of return to the internal rate
of return on Social Security is not valid, unless the cost of servicing
the legacy debt is first netted out of the comparison.
6: Personal Accounts will Worsen Social Security’s Financial
Problem. In truth, personal accounts neither hurt nor help
the long-run financial situation facing Social Security.
Myth 7: Personal Accounts Will Cause Benefit
Cuts. Personal accounts
are a natural candidate to include in a Social Security reform because
voluntary accounts have attractive properties that may increase the
utility of workers who choose them. If accounts are introduced at
the same time that scheduled benefits are reduced or taxes increased,
positive attributes of the accounts may help partially to offset
the negatives of the changes that move the system toward sustainability.
Myth 8: Personal Accounts are Risky and the Current System
is Safe. First, one of the core principles of reform is that participation
personal accounts be voluntary. Second, many reform proposals
allow individuals to choose a portfolio and allocation with which
comfortable. Third, it is a mistake to treat the existing Social
Security system as being free from risk.
Myth 9: Transitioning to Personal Accounts
is Too Costly. These “transition
costs” are not new costs at all, but rather a retiming of costs
that the Social Security system will eventually have to pay anyway.
The money flowing into personal accounts will eventually be used to
finance future benefit payments, which will reduce the level of benefits
that will need to be financed by payroll taxes on future workers.
Myth 10: Social Security Reform is Bad for
It is wrong to assume that the current Social Security system is
progressive and that any reformed system would not be. The system
can easily be
changed to make the degree of redistribution greater than, less than
or equal to that of the current system. Broad and simplistic assertions
that certain groups will necessarily win or lose by reform are unlikely
to withstand careful scrutiny.
The article is not intended to prescribe solutions to Social Security’s
funding problem. Rather, the key message is that, regardless of whether
or not personal accounts are created within the Social Security system,
any reform effort will require changes to both the tax and benefit
side of the system’s finances. While analysts may reasonably
disagree over the most appropriate method of reform, there should be
little disagreement that the system is in need of reform and that acting
soon to address the problem is preferable to doing nothing.
4. FLORIDA CORRECTIONAL OFFICER SQUEEZES THROUGH
In 2002, the Florida Legislature amended Section
112.18(1), Florida Statues, the so-called heart-lung statute. Two
things were changed:
One, the presumption was no longer limited to “state” law
enforcement officers and, two, correctional officers were added as
beneficiaries of the presumption. The statute now provides that any
condition or impairment of health of any firefighter, law enforcement
officer or correctional officer caused by tuberculosis, heart disease
or hypertension resulting in total or partial disability or death shall
be presumed to have been accidental and to have been suffered in the
line of duty unless the contrary be shown by competent evidence. However,
any such firefighter or law enforcement officer shall have successfully
passed a physical examination upon entering into any such service as
a firefighter or law enforcement officer, which examination failed
to reveal any evidence of any such condition. A judge of compensation
claims applied the statutory presumption in determining that correctional
officer Reese’s hypertension and heart disease were compensable.
The Department of Corrections appealed, arguing that Reese had not
successfully passed a pre-employment physical that failed to reveal
evidence of his ultimately-disabling heart or lung condition. Rejecting
the Department’s appeal, the First District Court of Appeal held
that although the statute directs that a condition precedent to a firefighter’s
or law enforcement officer’s entitlement to the statutory presumption
is proof that the firefighter or law enforcement officer successfully
passed a pre-employment physical examination revealing no evidence
of the later disability, the plain language of the statute does not
require a correctional officer to satisfy this condition. (The appellate
court also found “this distinction in requisite proofs is not
due to mere legislative oversight.” Nevertheless, we seriously
doubt that the Legislature really intended to prefer correctional officers
over firefighters and law enforcement officers. Let’s face it
-- somebody goofed.) Reese had one other hurdle to clear: his case
arose prior to the amendment adding correctional officers to the list
of employees entitled to the statutory presumption. Finding that the
enactment was merely “procedural,” the Court held that
a pre-2002 date of accident did not preclude Reese’s entitlement
to the statutory presumption in a post-2002 proceeding. State of Florida
v. Reese, 30 Fla. L. Weekly D2387 (Fla. 1st DCA, October 11, 2005).
5. RECENT TRENDS IN RETIREMENT PLAN PARTICIPATION
From February through May of 2003, the Bureau of
the Census collected information about participation in employer-sponsored
among individuals in more than 29,000 U.S. households. These data
are the most comprehensive source of information available on workers’ participation
in employer-sponsored retirement plans from a nationally representative
sample of American households. A Congressional Research Service analysis
showed that :
- Between 1998 and 2003, the percentage of private-sector
workers whose employers sponsored a retirement plan increased from
62% to 64.8%.
- The percentage of private-sector workers who participated
in employer-sponsored retirement plans increased from 43.1% in 1998
to 46.8% in 2003.
- 56.4% of workers in the private sector worked for
an employer that sponsored a defined contribution plan, such as a
Section 401(k) plan,
in 2003, an increase of 4.1 percentage points over the sponsorship
rate in 1998.
- 41% of private-sector workers participated in Section
401(k)-type plans in 2003, an increase of 5.6 percentage points over
rate in 1998.
- Among workers whose employers offered a DC plan in
2003, 72.6% participated in the plan, an increase of 4.9 percentage
points over 1998.
The variables with the strongest positive relationship to likelihood
of participating in a plan are length of service with an employer and
monthly earnings. Among workers whose employer sponsored a plan, men,
those over age 35, married workers, college graduates, full-time workers,
home owners, those at small establishments and those who employer contributed
to the plan were more likely than others to have participated in a
DC plan. Many workers who did not participate in DC plans believed
they were ineligible to participate. In 2003, 28% of respondents said
they had not worked for their current employer long enough to be eligible,
29% said that they did not work enough hours to be eligible and 9%
said that their particular job was not covered by the employer’s
plan. In 2003, the median employee monthly salary deferral into Section
401(k)-type plans was $158, or $1,896 on an annual basis. Eighty-five
percent of employees deferred less than $500 per month into these plans
in 2003. Only 3% of participants contributed $1,000 per month to DC
plans, equivalent to the annual maximum of $12,000 in effect during
2003. Among all private-sector workers who participated in DC plans
in 2003, the mean total account balance was $34,757 and the median
balance was $15,000.
6. UNION ADVANTAGE FOR BENEFITS WIDENS:
to Labor Research Association, union workers receive employer-paid
benefits that far
exceed benefits employers provide for nonunion workers, and the union
advantage is growing wider. For years, employers have been canceling
benefit coverage and shifting more of the remaining costs to workers.
Unions have been able to fight off this employer attack on benefits,
but nonunion workers have been left with inadequate health care protections
and no retirement security. The total union advantage stood at $10.27
per hour in June 2005, with union workers earning an average of $33.42
per hour in total compensation and nonunion workers averaging $23.15,
according to the Bureau of Labor Statistics June 2005 survey of employer
costs. The value of benefits that union workers receive is double
the value for nonunion workers. On average, union workers receive $12.50
an hour in benefits, compared with $6.38 for nonunion workers, according
to BLS. The largest differences in union and nonunion benefits occur
in the critical areas of health care and retirement benefits. Employers
contribute $3.46 per hour for health care benefits for union workers,
compared with just $1.42 for nonunion workers. Union workers receive
$2.37 an hour for retirement benefits, compared to $.71 for nonunion
workers. The BLS survey collects information from 4,560 private-industry
companies with 103 million workers. It is by far the most comprehensive
and reliable benefit survey available.
7. AN INTRODUCTION TO ALTERNATIVE INVESTMENTS:
is an alternative investment? Broadly speaking, an alternative investment
asset class other than the traditionally managed “long-only” stock
and bond portfolio. (Yes, twenty years ago real estate could have been
considered an alternative investment.) Today, alternative investments
normally refer to private equity, hedge funds and managed futures/commodities.
Investing in alternative assets can be difficult. These assets present
some unique challenges in terms of investment and legal due diligence,
planning and risk controls. However, prudent investments in alternatives
may increase total fund diversification and enhance long-term returns.
Before making any investments in the asset class, trustees should work
with their fund professionals (investment consultants and attorneys)
to develop a sound investment policy statement that clearly articulates
their fund’s objectives and limitations regarding such assets.
Investors should remember the terms “private equity” and “hedge
funds” are often used generically and represent a wide range
of investments with widely different levels and types of risk and return.
Therefore, new investors in these asset classes should perform extensive
due diligence and tread carefully. Investors should consider whether
the dollar amount of their allocation to alternatives is large enough
to achieve significant diversification, and whether they have the expertise
and resources to make investments directly in alternative strategies.
If not, such investors should consider using a “fund-of-funds” approach.
For example, a hedge fund-of-funds is a limited partnership vehicle
that in turn makes investments in many individual hedge funds. While
fund-of-funds vehicles do introduce another layer of fees, they can
provide diversification across many types of strategies and add professional
management, due diligence and oversight. This item is a summary of
an article in the October 2005 Benefits & Compensation Digest.
In Stuart, Florida, a 22 year old man
was on the run due to a charge of lewd and lascivious battery. He
had the bright idea
that he could avoid apprehension by ducking into a freezer in a local
Winn-Dixie. He actually managed to avoid detection for over 20 minutes.
When he was finally removed, however, the so-called “perp-sicle” was
quite ready for a nice warm jail cell. Sorry, couldn’t resist.
[October 14, 2005 plansponsor.com NewsDash]