Cypen & Cypen
NOVEMBER 30, 2006
Stephen H. Cypen, Esq., Editor
1. NCPERS GUIDANCE ON PENSION PROTECTION ACT OF 2006:
On August 17, 2006 President Bush signed into law the Pension Protection Act of 2006. Part of PPA included the number one legislative priority of National Conference on Public Employee Retirement Systems: the Healthcare Enhancement for Local Public Safety (HELPS) Retirees Act. Effective January 1, 2007, the HELPS Retirees Act will allow a yearly disbursement of up to $3,000 pre-tax from a governmental defined benefit pension, 403(b) or 457 plan to retired public safety officers for use toward health insurance premiums, long-term care insurance premiums or both. Disbursements, which must be made directly to the providers, will be tax-free. We reported on this important legislation in an earlier newsletter (see C&C Newsletter for September 28, 2006, Item 1), which dealt with the many questions raised by PPA. Now, NCPERS has issued some materials that are very helpful in this regard:
The above materials, which members may have already received directly from NCPERS, are also available at www.ncpers.org/artman/publish2/article_227.asp. Trustees will find the NCPERS materials to be very helpful in implementing this important new benefit.
2. IMPACT OF CURRENT TRENDS ON THE FUTURE ECONOMY:
In the same plansponsor.com piece as Item 1 in last week’s Newsletter, Keith Brainard (of NASRA) and Paul Zorn (of Gabriel, Roeder, Smith & Company) deal with the impact of current trends on the future economy. The difference in retirement benefits paid through pension and defined contribution plans raises a broad public policy question: what will happen to the U.S. economy as more people retire? According to the 2006 Social Security Trustees’ Report, the U.S. population age 65 and older will double over the next 25 years, from 37 million in 2005 (12% of total population) to 70 million (20% of total population) in 2030. As a result of the movement to DC plans, it is likely that income of many future retirees will be significantly less than their pre-retirement income. This situation means lower demand for goods and services, possibly for many years. By providing sufficient and sustainable retirement income, public pension plans help support the U.S. economy over the long term. They serve as financial engines, generating investment earnings from employer and employee contributions and returning the earnings to the economy as stable lifetime retirement income. A Wharton School Working Paper estimates that the higher investment returns generated by public pension plans, relative to DC plan returns, create an economic stimulus of 2% of gross domestic product, or more than $200 Billion, annually. This stimulus is continuous and steady, with dollars produced by higher returns distributed to local economies across the nation. While most public pension plans are in good financial condition, there are steps public plans can take to improve sustainability, especially in light of the volatile investment environment. First, to reduce downside investment risk, plans should review their asset allocations in light of likely investment returns and duration of their liabilities. Second, governments should avoid providing benefit increases based on “overfunding” or “excess assets.” Third, governments should contribute consistently amounts necessary to fund their pension plans and, if feasible, should establish reserves to help ensure contributions are made during cyclical economic declines. Finally, to the extent benefits cannot be sustained, new benefit tiers can be established to provide sustainable defined benefits for newly-hired employees. Well said, Guys.
3. QUOTE OF THE WEEK:
“Prediction is very difficult, especially
if it’s about the future.” Niels Bohr, Nobel
Laureate in Physics
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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.