1. PRESS RELEASE: MAJOR FINANCIAL CHALLENGES FACING AMERICANS LOOKING TOWARD RETIREMENT: GAO ISSUES CAPSTONE REPORT ON FEDERAL GOVERNMENT'S ROLE: The U.S. Government Accountability Office (GAO) issued a new report on the major challenges facing Americans as the retiree population grows. “The Nation’s Retirement System: A Comprehensive Re-evaluation Is Needed to Better Promote Future Retirement Security” details the issues facing the nation’s retirement system and the need to reexamine how the United States ensures retirement security for its citizens. The nation’s retirement system is made up of three main pillars, but fundamental changes have occurred over the past 40 years. It was explained that those three pillars—Social Security, employer-sponsored pensions or retirement savings plans, and individual savings—have all seen changes. This has made it increasingly difficult for individuals to plan for and effectively manage retirement. In particular, there has been a marked shift away from defined benefit to defined contribution plans as the primary type of retirement plan offered by private sector employers, which has increased the responsibility and risk for individuals’ retirement security. Also, economic and societal trends—such as increases in debt and health care costs—have occurred that can impede individuals’ ability to save for retirement. Finally, when it comes to Social Security, beginning in 2035, projections are that it will be unable to pay full benefits. Long-term fiscal projections show that, absent fiscal policy changes, the federal government is on an unsustainable fiscal path, largely due to spending increases driven largely by health care programs, demographic changes, and net interest on government debt. It has been nearly 40 years since there has been a comprehensive federal evaluation of the nation’s approach to financing retirement and the time has come for a new examination. GAO’s report focuses on four areas:
- Changes in the traditional pillars of the U.S. retirement system—Social Security, employer-sponsored pensions or retirement savings plans, and individual savings—along with economic and societal trends, such as rising debt and health care costs, that have made it difficult for Americans to plan for and manage retirement.
- Key challenges individuals face in achieving a financially secure retirement, such as accessing retirement plans through employers, accumulating adequate retirement savings, and ensuring that savings and benefits last through retirement.
- Fiscal risks and benefit adequacy concerns that threaten the central elements of the U.S. retirement system.
- The need for a comprehensive reevaluation of the nation’s approach to financing retirement, one that will address the impact of recent economic trends and the introduction of new financial products.
2. MIAMI POLICE UNION DEMANDS $350M IN BACK PAY, BENEFITS: In a media release published in www.law360.com, a police officers' union called for the City of Miami to pay more than $350 million in back pay and retirement benefits after a state agency's recent ruling that the city's unilateral changes to a collective bargaining agreement in 2010 violated Florida law. In a news conference, Miami Lodge 20, Fraternal Order of Police, Inc., called for the city to pay up the money that it says its members are owed, after the state's Public Employees Relations Commission ruled in the union's favor. The Union said the officers are owed more than $200 million in back pay and $150 million in retirement benefits. In a statement, the City of Miami said it is still reviewing the PERC decision, and stood by its actions. The city believes the actions taken in 2010 were necessary to prevent a financial meltdown of the City of Miami. The city does not agree with the Fraternal Order of Police's statement, and says it will continue to explore all legal options. In the decision, a PERC panel agreed with a hearing officer's determination that the city violated Florida law, when it unilaterally changed wages, pensions, health insurance and other items in the collective bargaining agreement, without completing the impasse resolution proceedings required by state law. Also, the panel agreed with the hearing officer and the FOP that the remedy in this case should be the traditional remedy when an employer unlawfully changes the parties' collective bargaining agreement; that is, a return to the status quo anteas it existed on September 29, 2010, the day prior to the effective date of the city's unlawful action,” PERC said in the decision. PERC rejected the city's arguments that existing case law allowed the city to take the unilateral actions, ruling that there was no such case law at the time. PERC also noted that the city's delay in taking action weakened its argument that it was dealing with an emergency situation. PERC said the city had known since April 30, 2010, that it was dealing with a financial urgency but did not act until August, 31. This delay plus the fact that the city engaged in negotiations with the FOP contradicts the city's contention that it was experiencing an exigent circumstance such as a hurricane, imminent strike, or riot. Although PERC ruled in the union's favor, it rejected the union's request for attorneys' fees and costs, because the issue was a novel one involving statutory interpretation and constitutional issues. The PERC decision comes after the Florida Supreme Court in March had ruled that a previous decision dismissing the union's unfair labor charge impairs a fundamental constitutional right to bargain collectively. In July 2013, the First District Court of Appeal, had affirmed a PERC decision dismissing the union's charge after determining that the city was facing a financial urgency that required modification of the parties' agreement. But, the Florida Supreme Court said the First District erred in holding that the state high court's 1993 decision in Chiles v. United Faculty of Florida, did not require a governmental entity to demonstrate that funds were not available from any other source before it could violate unions' constitutional right to bargain collectively. The Supreme Court of Florida said it clearly stated in Chiles that the employer must show funds are unavailable from any other possible reasonable source. The high court said adopting the First District's reasoning would allow a local government to declare a financial urgency and then, unilaterally, alter the terms and conditions, of a collective bargaining agreement without going through the process described in state law. State law allows for two weeks to resolve a dispute after the declaration of financial urgency and then includes an impasse resolution process. The case is Walter Headley, Jr., Miami Lodge #20, Fraternal Order of Police, Inc. v. City of Miami, Case Number CR-2017-001, (Florida PERC, October 18, 2017).
3. SHIFT TO DEFINED CONTRIBUTION PLANS CAUSES CONCERN INTERNATIONALLY: A recent survey from the American Academy of Actuaries, the U.K’s Institute and Faculty of Actuaries, and the Actuaries Institute of Australia found workers in the three countries have similar reasons for lamenting the shift from defined benefit (DB) pensions to defined contribution (DC) plans, says www.plansponsor.com. The report, which surveyed working-age respondents, ages 18 through 64, suggests a major factor contributing to this reaction is the growing demand on workers individually to manage the risks regarding their retirement. The step away from DB pension plans now requires these individuals to take greater responsibility in order to be secure financially in their retirement years. Academy Senior Pension Fellow Ted Goldman says that, while many workers begin the process of planning for retirement, most have trouble following through due to uncertainties about what that entails—this then turns to procrastination and inertia, as the survey notes. Questions that respondents have include how much savings is needed for retirement, how do you afford a longer life than planned, and how do you handle unforeseen costs for health conditions in later years? Additionally, women revealed they are less prepared than men in all three countries. To combat these uncertainties, the survey encourages education teaching financial literacy and retirement planning based on age, gender and income—for all three countries; development of projection tools for education; a wider use of default features in private retirement plans such as implemented default and automatic enrollment in the earliest stages of people’s careers; and supportable and dependable public pension and insurance systems. As to educational needs, the survey reports that, respondents, on average, said they are best prepared in taking action to save, acquiring information, and in planning to return to work if retirement assets drop in value. Understanding and managing complex retirement risks presents a societal challenge, not just a personal one. As a society, we need to be open to new retirement policy approaches and public education initiatives to help people evaluate and address the risks and achieve financial security in retirement.
4. BAD NEWS: YOUR 401(k) WILL NOT GIVE YOU A DECENT RETIREMENT: For nearly 40 years now, we have been hearing that 401(k) plans are the key to a comfortable retirement, reportswww.latimes.com/business. By giving a tax break to workers contributing part of their paychecks to their retirement nest eggs, the plans were designed to supplement Social Security benefits and employer pensions. Instead, they’ve become substitutes, not supplements, for employer pensions and bulwarks against continuous attacks on Social Security benefits. A new survey from Boston College’s Center for Retirement Research demonstrates, however, that 401(k) plans are destined to fail millions of Americans. They are not offered by enough employers, they are not taken up by enough workers, and for most people, and their balances are not large enough to provide for a decent retirement. All these factors weigh most heavily on middle- and lower-income workers, the segment in which the participation rate and balance accumulation are disproportionately low. The survey authors point to an important difference between 401(k)-type defined contribution plans on the one hand and traditional defined-benefit pensions and Social Security on the other. The latter provide lifetime benefits; the former provide steady retirement income only if they are managed carefully by their owners during retirement. They face the risk of either spending too quickly and outliving their resources or spending too conservatively and depriving themselves of necessities. Individuals are on their own. This is an important issue, because it goes to the heart of the retirement crisis facing millions of Americans. Conservatives never tire of claiming that the retirement crisis is a myth, based on their assertion that retired Americans have consistently under-reported their income and in fact are doing just fine. The subtext of their argument is that Social Security benefits can be cut without causing much pain. That is a faulty conclusion. The rise of the 401(k) would not be much of a problem if these accounts provided an effective way to husband assets for retirement periods that are growing longer, or if Social Security and employer pensions were as secure as they used to be. Social Security’s full retirement age is increasing to as high as 67 (for those born in 1960 or later) from the traditional 65. The change means that those subject to the maximum retirement age who nevertheless retire at 65 will receive 86.7% of their full benefits. In other words, most new retirees are facing a benefit cut, one way or another. The 401(k) model has its virtues. The plans are portable, so they do not tie workers to a single employer over a lifetime. They are not quite as back-loaded as defined-benefit plans, which provide exponentially higher rewards to workers with high longevity. In an age when traditional defined-benefit plans are an endangered species in the private sector, at least they are something. But how good are they at providing retirement security? Not too good at all. First, the rise of defined-contribution retirement plans has not compensated for the disappearance of defined-benefit pensions. Since 1999, the percentage of private-sector workers offered any retirement plan at all by their employers has plummeted, from 64% to 43%. The level is lower today even than in 1979, just at the inception of the 401(k) era, when 59% of workers were offered one type or another, or both. The last three or four decades has seen an almost complete disappearance of defined-benefit pensions in the private sector. In 1983, 88% of workers were covered by defined-benefit plans, including 26% who also had access to defined-contribution plans. In 2016, 17% are covered by defined-benefit plans alone and an additional 10% have both plans. The share of workers with 401(k) defined-contribution plans only has risen from 12% in 1983 to 73% today. See the full report and video atwww.latimes.com/business/hiltzik/la-fi-hiltzik-401k-20171010-story.html.
5. TEACHERS AND SCHOOLS ARE WELL SERVED BY TEACHER PENSIONS: In recent years, several studies have argued that teacher pensions are a raw deal for most teachers and should be replaced with account-style plans, reports www.epi.org/publications. In reality, however, most teachers working today are building a secure retirement:
- Claims that most teachers do not benefit from pensions are based on studies that give equal weight to career teachers and to those who leave after a year or two rather than examining a cross section of the teaching workforce.
- Research that is based on a cross section of teachers in California found that at least three-fourths of teachers accumulate 20 years of service or more in their retirement plan and at least half accumulate 30 years or more. These teachers earn a healthy return on contributions and a level of retirement security few participants in account-style plans can count on.
- While attrition is high in the first years, teachers who end up leaving the profession are a small share of the teaching workforce and at a minimum recover their contributions to the pension plan plus interest. They may not leave with substantial accrued benefits, but they are not being deprived of something they would likely have gotten elsewhere. Young workers in general do not accrue much in retirement savings, no matter what their profession.
- Some young teachers who leave before vesting in their retirement plan move to teach in another state or another district in the same state, and they typically accumulate significant retirement benefits in their second jobs.
- Mobile teachers who switch districts mid-career and retire at the normal retirement age receive full pension benefits based on their total years of service, though some of these benefits are tied to lower earnings from their first jobs. In contrast, teachers who spend their careers in one district earn higher benefits because all their service credits are tied to their final salaries, typically averaged over three to five years. The fact that service credits are worth more to teachers who retire after spending their careers in a single district is a positive feature of pensions because it discourages turnover, and this feature is not as disadvantageous to mobile teachers as critics suggest.
- Teachers who choose to retire after the normal retirement age continue to accrue service credits and salary increases that translate into higher lifetime incomes. Critics who point out that these teachers are not fully compensated for their shorter expected retirements ignore the fact that experienced teachers earn higher salaries and are not unduly disadvantaged if they choose to work past the normal retirement age.
The myth that most teachers get a raw deal while a lucky few receive generous pensions lives on despite having been soundly debunked. The purveyors of this myth suggest that older, experienced teachers are benefiting at the expense of younger and more mobile peers. They use their flawed research to advocate for replacing teacher pensions with account-style plans, such as cash balance plans and 403(b) plans, which are similar to 401(k) plans. Account-style plans are inefficient because they do not pool investment risk, typically have lower investment returns, and create perverse incentives that encourage turnover or cause workers to time their retirements based on stock market performance. A shift to account-style plans would not benefit most teachers and would increase teacher turnover to the detriment of students. While the existing pension system can and should be tweaked to meet changing needs, it successfully serves the goals of attracting and retaining teachers, promoting orderly retirement, and providing retirement security.
6. IRS ANNOUNCES 2018 PENSION PLAN LIMITATIONS; 401(k) CONTRIBUTION LIMIT INCREASES TO $18,500 FOR 2018: The Internal Revenue Service announced the cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2018. The IRS today issued technical guidance detailing these items in Notice 2017-64. Highlights of Changes for 2018: The 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 $18,000 to $18,500. The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the saver’s credit all increased for 2018. Taxpayers can deduct contributions to a traditional IRA, if they meet certain conditions. If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2018:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $63,000 to $73,000, up from $62,000 to $72,000.
- For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $101,000 to $121,000, up from $99,000 to $119,000.
- 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 $189,000 and $199,000, up from $186,000 and $196,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
- The income phase-out range for taxpayers making contributions to a Roth IRA is $120,000 to $135,000 for singles and heads of household, up from $118,000 to $133,000. For married couples filing jointly, the income phase-out range is $189,000 to $199,000, up from $186,000 to $196,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
- The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $63,000 for married couples filing jointly, up from $62,000; $47,250 for heads of household, up from $46,500; and $31,500 for singles and married individuals filing separately, up from $31,000.
The limit on annual contributions to an IRA remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000. 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 $6,000.IRS Issue IR-2017-177 (October 19, 2017).
7. TAXPAYERS WHO ARE VICTIMS OF DOMESTIC ABUSE SHOULD KNOW THEIR RIGHTS: Domestic abuse often includes control over finances. An important part of managing finances is understanding one’s tax rights. Taxpayers have the right to expect the IRS to consider facts and circumstances that might affect the individual’s taxes. Taxpayers have the right to:
- File a separate return even if they are married.
- Review the entire tax return before signing a joint return.
- Review supporting documents for a joint return.
- Refuse to sign a joint return.
- Request more time to file their tax return.
- Get copies of prior year tax returns from the IRS.
- Seek independent legal advice.
Taxpayers also have the right to request relief from the liability shown on a joint return. This is known as innocent spouse relief. Here are a couple of examples: A taxpayer signs a joint return with their spouse. The taxpayer thought their spouse paid all taxes due. The IRS contacts the taxpayer because the taxes shown on the joint return were not paid. Example 2: The taxpayer signs a joint return with their spouse. The taxpayer did not know about their spouse’s unreported income or erroneous deductions. The IRS adjusted the taxes due because of their spouse’s improper items. To apply for Innocent Spouse Relief, a taxpayer fills out Form 8857, Request for Innocent Spouse Relief. IRS TT-2017-62 (October 19, 2017).
8 NEW OFFICE ADDRESS: Please note that Cypen & Cypen has a new office address: Cypen & Cypen, 975 Arthur Godfrey Road, Suite 500, Miami Beach, Florida 33140. All other contact information remains the same.
9. CRAZY STATE LAWS: Good Housekeeping reminds us that there are crazy laws in every state. In South Dakota don't you dare sleep in the cheese factory. This was outlawed with the same logic behind not falling asleep at the wheel. It is not the wisest idea to be operating large machinery while dozing off; however, if the cheese is packaged you are in the clear to work around the clock!
10. INSPIRATIONAL QUOTE: Twenty years from now you will be more disappointed by the things that you did not do than by the ones you did do, so throw off the bowlines, sail away from safe harbor, catch the trade winds in your sails. Explore, Dream, Discover. – Mark Twain
11. PONDERISMS: Middle age is when broadness of the mind and narrowness of the waist change places.
12. FUNNY TOMBSTONE SAYINGS: Some tombstones are clever and could make you die from laughter. One tombstone reads: You should see the other guy.
13. TODAY IN HISTORY: On this day in 1988, Donald Trump bills Mike Tyson $2,000,000 for 4 months' advisory service.
14. 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.
15. 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.
16. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.