1. US PENSION GAP IS “GOOD NEWS”: The largest 100 U.S. public pension funds have around $1.2 trillion of unfunded liabilities, about $300 billion above the nearly $900 billion they reported themselves, according to an actuarial study reviewed by financialmirror.com. The pension systems reported a median funding level of 75.1 percent, compared to the Milliman report’s funding of 67.8 percent. Milliman said the multi-billion dollar difference was good news because the results should reassure the public that America's public pensions in general are accurately reporting their funding shortfalls. The difference between what public pensions across the United States have reported and what Milliman found was not significant, a relatively small change in the way the figures are calculated could lead to seemingly outsized results because the funds are so large. The numbers really did not change that much. Both pension funds' reported results and Milliman's findings fell within the range of previous estimates from other studies of the total size of the public pension shortfall in the United States. The 100 funds Milliman studied used a median rate for their investments of 8 percent; however, the recession slashed into the market, dropping actual median returns to just 3.2 percent for the last five years. The difference has prompted critics to claim that the funds are underreporting their unfunded liabilities. Critics have called for public pensions to reduce their assumed rates of return to as little as 5 percent, which would cause unfunded liabilities to soar. This study found that the median discount rate should actually be 7.65, rather than the 8 percent median the funds used in aggregate. A third of the plans were actually using lower rates than they needed to use.
2. SOCIAL SECURITY WILL RISE 1.7% FOR 2013: The United States Social Security Administration has announced that monthly Social Security and Supplemental Security Income benefits for nearly 62 million Americans will increase 1.7 percent in 2013. The 1.7 percent cost-of-living adjustment will begin with benefits that more than 56 million Social Security beneficiaries receive in January 2013. Increased payments to more than 8 million SSI beneficiaries will begin on December 31, 2012. Some other changes that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $113,700 from $110,100. Of the estimated 163 million workers who will pay Social Security taxes in 2013, nearly 10 million will pay higher taxes as a result of the increase in the taxable maximum. Note that the employee rate of 7.65% is combined for Social Security and Medicare. The Social Security portion (OASDI) is 6.20% on earnings up to the applicable taxable maximum. The Medicare portion (HI) is 1.45% on all earnings. The Temporary Payroll Tax Cut Continuation Act of 2011 reduced the Social Security payroll tax rate by 2% on the portion of the tax paid by the worker through the end of February 2012. The Middle Class Tax Relief and Job Creation Act of 2012 extended the reduction through the end of 2012. Under current law, the temporary reduction expires at the end of December 2012.
3. IRS ANNOUNCES PENSION PLAN LIMITATIONS FOR 2013: The Internal Revenue Service announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2013. In general, many of the pension plan limitations will change for 2013 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged because increase in the index did not meet the statutory thresholds that trigger their adjustment. Highlights include:
- The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,000 to $17,500.
- The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $5,500.
- The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes between $59,000 and $69,000, up from $58,000 and $68,000 in 2012. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $95,000 to $115,000, up from $92,000 to $112,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $178,000 and $188,000, up from $173,000 and $183,000.
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Commissioner annually adjust these limits for cost-of-living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures that are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act. Limitations that are adjusted by reference to Section 415(d) generally will change for 2013 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $17,000 to $17,500 for 2013. This limitation affects elective deferrals to Section 401(k) plans, Section 403(b) plans, and the Federal Government’s Thrift Savings Plan. Effective January 1, 2013, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $200,000 to $205,000. For a participant who separated from service before January 1, 2013, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2012, by 1.0170. The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2013 from $50,000 to $51,000.
The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2013 are as follows:
- The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $17,000 to $17,500.
- The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $250,000 to $255,000.
- The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost-of-living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $375,000 to $380,000.
- The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $17,000 to $17,500.
IR-2012-77 (October 18, 2012).
4. DEFINITION OF “CONVICTED” IN FORFEITURE STATUTE AUTHORIZED BY CONSTITUTION DOES NOT IMPERMISSIBLY BROADEN CONSTITUTIONAL PROVISION: A former employee appealed the Florida Department of Management Services’ final order concluding that, pursuant to Section 112.3173, Florida Statutes, he was "convicted" of a specified offense based on his no contest plea, thereby requiring forfeiture of his Florida Retirement System rights and benefits. The former employee argued that Section 112.3173, by defining "convicted" to include a no contest plea, regardless of lack of a guilty plea or adjudication, unconstitutionally broadens the term "convicted" beyond its plain meaning as used in Article II, Section 8 of the Florida Constitution, and the people have the right to secure and sustain that trust against abuse. The Constitutional provision is not self executed, providing that a public officer or employee who is convicted of a felony involving a breach of public trust shall be subject to forfeiture of rights and privileges under a public system or pension plan in such manner as may be provided by law. Section 112.3173, Florida Statutes, is that law. It provides, among other things, that any public officer or employee who is convicted of a specified offense committed prior to retirement, or whose office or employment is terminated by reason of his admitted commission, aid, or abetment of a specified offense, shall forfeit all rights and benefits under any public retirement system of which he is a member, except for the return of his accumulated contributions as of his date of termination. The Section also defines convicted to include a plea of nolo contendere. Statutes come clothed with a presumption of constitutionality, and must be construed whenever possible to effect a constitutional outcome. Should a doubt exist that an act is in violation of any constitutional provision, the presumption is in favor of constitutionality. To overcome the presumption, invalidity must appear beyond reasonable doubt, for it must be assumed the legislature intended to enact a valid law. Here, alleged invalidity of section 112.3173 does not appear beyond reasonable doubt. Brock v. Department of Management Services, Division of Retirement, 37Fla.L.Weekly D2421 (Fla. 4th DCA October 17, 2012).
5. CORRECTIONAL OFFICER’S PRESUMPTION OF OCCUPATIONAL CAUSATION FOR DISABLING HEART DISEASE NOT REBUTTED BY PRESENCE OF VIRAL GASTROENTERITIS: Walters appealed an order of the judge of compensation claims denying all benefits claimed on account of his heart disease. Section 112.18, Florida Statutes --variously known as the "Firefighter's Presumption," the "Heart and Lung Bill" or the "Heart-Lung Statute" --creates a rebuttable presumption of occupational causation for disabling heart disease suffered by correctional officers who meet certain prerequisites. The presumption is dispositive unless rebutted by medical evidence. In order to rebut the presumption, the medical evidence must prove the disease was caused by a specific, non-work related event or exposure, some non-work-related factor. The presumption can also be rebutted by proof of a specific combination of wholly non-industrial causes. The parties stipulated to the factual predicate necessary to give rise to the statutory presumption of occupational causation. He had been diagnosed with myopericarditis and cardiomyopathy, which he claimed benefits attributable to his heart disease. After the state denied the claim, the judge of compensation claims, while acknowledging that the statutory presumption arose, ruled the State had rebutted the presumption with testimony that Walters's heart disease was attributable to viral gastroenteritis. There was no dispute that Walters’s cardiac problems were traceable to a stomach virus, but because the etiology of his viral gastroenteritis was unknown, the State failed to prove that the cause of his heart disease was non-occupational, and thus failed to rebut the section 112.18 presumption. The presumption obviated any requirement on his part to prove that he contracted the virus at work. The state had the burden to prove that Walters did not come down with the virus at work, and failed to carry its burden. Accordingly, the case was reversed and remanded with directions that the judge of compensation claims award medical benefits for the care and treatment of Walters’s heart disease and any other workers' compensation benefits he is entitled to on account of his heart disease. Walters v. State of Florida –DOC/Division of Risk Management, 37Fla.L.Weekly D2408 (Fla. 1st DCA October 16, 2012).
6. COLORADO APPELLATE COURT REVERSES RETIREES’ ATTACK ON RETROACTIVE COST-OF-LIVING ADJUSTMENT: Recipients of retirement benefits through the Colorado Public Employees' Retirement Association challenged sections of a 2010 Colorado Bill that reduced the amount they were entitled to receive as a cost-of-living adjustment to their benefits. Specifically, they claimed that this reduction violated their rights under the Contract Clauses of the United States and Colorado Constitutions and the Takings Clause of the United States Constitution. The district court granted summary judgment in favor of the State and board of trustees of the pension plan. The court ruled that the retirees had no contractual right to the COLA in effect when they retired, and that absent such a contractual right, the retirees claims necessarily fail. On appeal, the retirees, contended that under prior Colorado case law they had a contractual right to the COLA in effect when they became eligible to retire or retired, which could not be reduced. The Colorado Court of Appeals (an immediate appellate court) agreed with the retirees, subject to certain limitations. Specifically, the appellate court concluded that the retirees had a contractual right, but that the court must still determine whether any impairment of the right is substantial, and, if so, whether the reduction was reasonable and necessary to serve a significant and legitimate public purpose. Therefore, the higher court reversed the trial court, and remanded the case for further proceedings. Apparently, either party can petition the Colorado Supreme Court for further review. Justus v. The State of Colorado, Case No, 11CA1507 (Colo. App. October 11, 2012).
7. ROTH IRA NOT “PENSION PLAN?”: A recent appeal of a final judgment of dissolution of marriage raised several garden-variety of issues do not merit mention. However, one statement caught our eye. Husband asserted that a Roth IRA was partially non-marital, and thus it was error for the trial court to grant a full 50% of its value to the wife where he contended that she did not meet her burden of proving what portion of the account was hers. Therefore the entire account should have been given to him. The husband cited a 1989 case, which held that the burden was on the nonparticipant spouse to prove a marital interest in a pension plan and its value. The court responded with the curious statement that there was no evidence that Roth IRA was a "pension plan" as contemplated by the earlier case, or how it was funded, or the date it was funded. There was no evidence before the trial court from which it could have concluded there was any claim by either party that it was other than a marital asset. In agreement with the burden established by the earlier case, the court found that it was not error to grant 50% interest in the Roth IRA to each party. The court remanded for adjustment of other issues but stated that since the husband failed to adduce evidence that any portion of the IRA was non-marital, he is not entitled to a second bite at the apple to do so on remand. Nolan v. Nolan, 37 Fla. L. Weekly D2469 (Fla. 5th DCA October 19, 2012).
8. FEDERAL APPELLATE COURT INVALIDATES DOMA: Windsor, surviving spouse of a same-sex couple married in Canada and resident in New York at the time of her spouse’s death, sued the United States because she was denied the benefit of the spousal deduction for federal estate taxes under 26 U.S.C. § 2056(A) solely because Section 3 of the Defense of Marriage Act, 1 U.S.C. § 7, defines the words “marriage” and “spouse” in federal law in a way that bars the Internal Revenue Service from recognizing Windsor as a spouse or the couple as married. Windsor’s claim for a refund of over $360,000 turned on the constitutionality of that section of federal law. Intervenor Bipartisan Legal Advisory Group of the United States House of Representatives appealed in order of the district court granting summary judgment in favor of Windsor the United States, defendant was a nominal appellee. For the reasons that follow, the U.S. Second Circuit Court of Appeals concluded that Section 3 of the Defense of Marriage Act violated equal protection, and is therefore unconstitutional. Windsor has standing in this action because New York, which did not permit same-sex marriage to be licensed until after a spouse died, would nevertheless have recognized the marriage at time of the death so that Windsor was a surviving spouse under New York law. Windsor’s suit was not foreclosed by a 1971 U.S. Supreme Court decision that held use of the traditional definition of marriage for a state’s own regulation of marriage status did not violate equal protection. Section 3 of DOMA is subject to intermediate scrutiny under the factors enumerated in a line of cases. The statute did not withstand that review. The appellate court was faced initially with an issue concerning alignment of the parties on appeal. The United States, named as the sole defendant, conducted its defense of the statute in the district court up to a point. Three months after suit was filed, the Department of Justice declined to defend the Act thereafter, and members of Congress took steps to support it. The Bipartisan Legal Advisory Group of the United States House of Representatives retained counsel, and since then has taken the laboring oar in defense of the statute. The United States remained active as a party, switching sides to advocate that the statute be ruled unconstitutional. Following the lower court’s decision, Bipartisan Legal Advisory Group filed a notice of appeal, as did the United States in its role as nominal defendant. Bipartisan Legal Advisory Group moved to strike the United State’s notice of appeal to realign the appellate parties to reflect that the United States prevailed in the result it advocated in the district court. The motion was denied. Notwithstanding the withdrawal of its advocacy, the United States continues to enforce Section 3 of DOMA, which is indeed why Windsor did not have her money. One point of interest: both the two-judge majority and one-judgment already opinions are about 40 pages each. However, the time within which the decision was reached was incredibly short. The case was argued on September 27, 2012 and decided on October 18, 2012, a mere three weeks later. Of greater importance perhaps than the case itself is the court’s conclusion that review of Section 3 of DOMA required heightened scrutiny. In this case, all four required factors justified heightened scrutiny:
(a) Homosexuals in the group homosexuals as a group have historically endured persecution and discrimination;
(b) Homosexuality has no relation to aptitude or ability to contribute to society;
(c) Homosexuals are a discernible group with non-obvious distinguishing characteristics, especially in the subset of those who enter same-sex marriages; and
(d) The class remains a politically weakened minority.
However, this mistreatment is not sufficient to require the most exacting scrutiny; the court then used intermediate scrutiny to review the polity of DOMA under intermediate scrutiny, a classification must be substantially related to an important government interest. The court’s straightforward legal analysis sidestepped the fair point that same-sex marriage is unknown to history and tradition but law (federal or state) is not concerned with holy matrimony. Government deals with marriage as a civil status--however fundamental--and New York has elected to extend that status to same-sex couples. A state may enforce and dissolve a couple’s marriage, but it cannot sanctify or bless it. For that, “the pair must go next door.” Windsor v. United States of America, Docket No. 12-2335 and 12-2435 (US 2d Cir. October 18, 2012).
9. FIVE HUGE MYTHS ABOUT SOCIAL SECURITY: Social Security has been providing Americans with old age, disability, and widow/orphan insurance for as many as 77 years. But like so many of today's crucial financial topics, it is also shrouded in myth. Here are five big ones from The Motley Fool:
- Myth No. 1: Social Security is going bankrupt. The biggest misunderstanding out there relates to Social Security's financial challenges. In fact, however, Social Security is not going bankrupt and bankruptcy is not really possible as the system is currently set up. The source of the confusion: Historically, Social Security has collected more than it paid out. The extra money built up in a trust fund that collects interest. Due to demographic and economic changes, it is expected that insurance payments will begin to exceed income in 2021. Around 2033, the fund will run out. Nevertheless, even then, the revenue Social Security collects each year would still be enough to pay out three-quarters of scheduled benefits as far as the eye can see. Of course, doing nothing would mean that Social Security will not be able to meet its full obligations two decades from now -- but it is not going bankrupt.
- Myth No. 2: Meeting Social Security's future shortfall is really hard. We only need to come up with about 0.9% of GDP in order to make Social Security's revenues match up with its expenses for the next 75 years. In perspective, 0.9% is close to the cost of unemployment insurance, the high-end Bush tax cuts, or one-fifth of the defense budget. There are two basic ways to close the gap. We could increase payroll tax revenue by raising the cap (currently any personal income beyond $110,100 is exempt from Social Security payroll taxes –increasing to $113,700 for 2013) or raising the rate. On the other hand, we could cut benefits by lowering payments, raising the retirement age or both. Generally speaking, polls tend to show more support for revenue increases than benefit cuts.
- Myth No. 3: Social Security's financial challenges are due to rising life expectancies. This one is only partially true. For the past few decades, there have been about three workers for every Social Security beneficiary. It is estimated that ratio will fall to around two by 2035. Since Social Security's revenue is generated by workers, a rising proportion of beneficiaries to workers puts a strain on the system. The idea that it makes sense to cut benefits by raising the retirement age naturally arises out of the fact that life expectancies are rising. However, three things are important to keep in mind. First, a declining proportion of workers to beneficiaries does not automatically mean Social Security can not support its beneficiaries, because workers become more productive over time. Second, although it is true that life expectancies at birth have risen quite a bit over recent decades, the more important metric -- life expectancies for 65-year-olds – has only risen by about two years since 1980.
- Myth No. 4: Social Security adds to the deficit. Social Security cannot add to the deficit, because it has its own funding source (Social Security payroll taxes) and is not allowed to spend any money it does not have. Much of the confusion comes from the fact that under federal accounting practices, Social Security is represented in the consolidated federal budget, as well as from the fact that Social Security's trust fund, like many insurance funds, invests in Treasury bonds. The exception has been the payroll tax holiday, which lowered payroll taxes starting in January 2011 in order to stimulate the economy. During that period, the federal government made up the lost revenue to Social Security that would have been collected.
- Myth No. 5: Social Security only provides retirement benefits. Social Security is not a retirement savings plan. It is actually a universal insurance program that helps protect workers, retirees, and their families from life's unknowns. Most Social Security benefits do support retirees via old-age insurance, but some also provide insurance in case people become disabled, widowed, or orphaned.
Remember that Social Security makes up the majority of income for two-thirds of all retirees. It will continue to be around unless we decide to eliminate it. At the same time, Social Security was never meant to cover our full income needs during retirement. The average retirement benefit is $1,235.00, but probably not enough by itself to live off of comfortably. Retirement experts generally estimate that maintaining a preretirement lifestyle requires about 70% of preretirement income.
10. A BAD DAY AT HALLMARK: Congratulations on your promotion. Before you go...would you like to take this knife out of my back? You will probably need it again.
11. PUNOGRAPHICS: England has no kidney bank, but it does have a Liverpool.
12. QUOTE OF THE WEEK: Instead of giving a politician the keys to the city, it might be better to change the locks. Doug Larson
13. THIS DAY IN HISTORY: In 1964, Viking Jim Marshall runs 66 yards in wrong direction for a safety.
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