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Cypen & Cypen
NEWSLETTER
for
December 26, 2013

Stephen H. Cypen, Esq., Editor

1.  PUBLIC PENSION PLAN ASSETS HIT NEW HIGHS: Holdings of U.S. public pensions again reached record highs during the third quarter, as the stock market surged and governments and employees pitched in billions of dollars, according to Reuters. The cash and security holdings of the 100 largest public employee retirement systems in the country, representing almost all public pensions, reached $3.06 trillion in the third quarter of 2013, a 9.8% rise from the same quarter in 2012 and a 4% increase from the previous quarter. The Standard & Poor's 500 Index has a total return of 29.6% so far this year, putting it on pace for its best year since 1997. Through the third quarter, its total return was 19.8%. Corporate stocks, making up about a third of pension holdings, hit $1.06 trillion in the quarter, 11.4% more than in the third quarter and 3.8% more than the prior quarter. International securities rose 16.6% over the year, to $637.8 billion. Altogether, the pensions' investment earnings totaled $120.13 billion in the three months that ended on September 30, 2013, the largest quarterly gain since the first quarter of 2012.  Bonds, however, have been lagging in recent months over concerns about the future of the Federal Reserve's massive bond buying stimulus program, which Central Bank said it would begin reducing in January. In the third quarter corporate bond holdings were $323.2 billion, moderately higher than the second quarter's $321.5 billion, but 7.1% lower than $347.8 billion in the third quarter of 2012. Treasury holdings fell 0.2% from the second quarter to $265.7 billion, but rose 8.1% from the third quarter of 2012. Governments put $22.2 billion into public pensions in the third quarter, which was 3.2% less than the previous quarter, but 14.5% higher than the third quarter of 2013 and the largest amount for the third quarter on record. Employees put in $8.3 billion, down 27.5% from the previous quarter. Still, employee contributions were 3.9% higher than the same period in 2012 and the largest third quarter amount on records going back to 1974. Benefit payments, which had steadily risen since the third quarter of last year, eased during the quarter to $57.71 billion from $60.85 billion in the second quarter.
 
2. ROLE OF SOCIAL SECURITY, DEFINED BENEFITS AND PRIVATE RETIREMENT ACCOUNTS IN FACE OF RETIREMENT CRISIS: On December 18, 2013 the United States Senate Committee on Finance Subcommittee on Social Security, Pensions, and Family Policy conducted a hearing on the role of Social Security, Defined Benefits and Private Retirement Accounts in the Face of Retirement Crisis. Senator Sherrod Brown (D/Ohio), Chairman, made an opening statement that encapsulates the issues:
 
Retirement security in America has traditionally been thought of as a three-legged stool: Social Security, employer-provided pensions, and personal savings and   investment.
 
The first leg of the “stool,” Social Security, guarantees a modest but stable income during retirement years.
         
But it is not just for retirement security. It also provides basic financial security in the face of unexpected tragedy. Social Security provides a vital safety net to the disabled, the orphaned, and widows and widowers -- something traditional retirement plans are unable to provide.
         
The two other legs of the “stool,” personal savings and pension plans, build upon the bedrock of Social Security and allow families to maintain the standard of living they enjoyed while they were working. This protects our seniors but it also allows families to use their resources to buy homes, start families, and pay for education.
         
Without retirement savings, aging parents become dependent on their working-age children, preventing those children from saving for their own retirement and perpetuating the cycle of economic distress in the retirement years.
         
Unfortunately, for far too many Americans, Social Security is the only leg left standing.
         
The percentage of workers covered by traditional, defined benefit plans has been declining steadily over the past 35 years. There are now only some 30,000 private sector defined benefit pension plans, down from 112,000 in the mid-1980s.
 
From 1979 to 2011, the proportion of private workers with retirement plans covered by defined benefit pension plans fell from 62% to 7%.
 
At the same time, the percentage participating in defined contribution plans, which inherently hold more challenges, increased from 16% to 66%.
 
Only half of America’s defined contribution plans have auto enrollment. At a time when we are told that we are in charge of our retirement futures, only one quarter of American workers have automatic access to a defined contribution plan.
 
Today, about half of the US workforce is covered by an employer sponsored retirement plan, meaning that nearly half of Americans are not participating in any employer-sponsored plan.
         
And that is the larger problem.
 
Working families are being squeezed from every angle. Wages are stagnant. Home values have plummeted.
 
And tuition costs for our children are increasing at the time we begin to care for our aging parents.

Today, middle class and low-income seniors rely on Social Security for the majority of their retirement income, while workers aged 50 – 64 are increasingly unprepared for retirement.
 
The challenges facing workers are dire.
 
The vast majority of economic gains in the last 25 to 30 years have gone to those at the very top of the income distribution in this country.
         
Middle-class workers have not shared in the economic gains or seen increased income associated with increased productivity and higher corporate profits – meaning costs go up, but the ability to save declines.
         
The picture gets bleaker when considering racial disparities in wealth. Today, the median wealth of white households is 20 times that of black households and 18 times that of Hispanic households – the largest ratios since the government began publishing this data about 25 years ago.
         
These factors are why most Americans have saved only a fraction of what they need for retirement. Workers approaching retirement age have an average retirement savings of less than $27,000.
         
One third of Americans aged 45 – 64 have nothing saved for retirement at all.
         
The numbers are no better for workers with a retirement plan. In 2010, 75% of Americans nearing retirement age had less than $30,000 in their retirement accounts.
 
For minority workers the situation is dire, with a median retirement account balance of $30,000. Eighty percent of Latino households age 25 – 64 have less than $10,000 in retirement savings.
         
These facts illustrate how great the need is for maintaining and expanding Social Security – the only source of guaranteed lifetime benefits on which most retirees can rely.
         
Social insurance does not just provide much needed financial support. It ensures that hardworking middle-class people can retire with dignity.
         
For the majority of recipients, these modest benefits provide over half of their income — lifting over 22 million Americans out of poverty.
         
The program is not only retirement insurance, it is family income insurance: One-third of benefits go to children, widows, and the disabled. And one in ten children today lives with a grandparent.
         
Rather than asking how we should scale back the program, we should be asking ourselves how we can strengthen it – and not by reducing benefits or raising the retirement age.
         
Maintaining or expanding Social Security is the single most effective thing we can do to prevent poverty and economic ruin for millions of senior citizens, while promoting economic mobility for their children and grandchildren.
         
The budget debate creates a vacuum that does not take into account the economic impact of Social Security programs.
         
 Yes, Social Security benefit cuts will decrease our ten-year deficit, but such cuts do not consider the impact on seniors, their families which then must support them, and current middle-and low-income workers.
         
Social Security is not a simple budgetary issue – it is a macroeconomic issue. Shifting the costs from the federal ledger does not resolve our retirement and savings problems.
         
Social Security reforms should be considered as part of the Finance Committee’s examination of the burgeoning retirement crisis. And I see this hearing as an important first step in that direction.
         
I want to yield to my ranking member, Senator Toomey. The Senator and I may disagree on policy particulars, but we both know that these issues are critical for our country, and I am thankful that he is willing join me in examining and engaging in this critical work.
 
National Conference on Public Employee Retirement Systems submitted a written statement for the hearing record, including: “public pensions on average cost less that 6% of state budgets and virtually all public pension are contributory plans, meaning that that the employees who participate in the plans help pay for their own benefits. Contrary to common misconceptions, the average public pension benefit is around $25,000 per year. While the benefits are modest, it does represent enough income replacement so that pensioners can maintain their standard of living in their retirement years and not become wards of the state.”
 
3. ADDITIONAL INFORMATION ON 2013 LONG TERM PROJECTIONS FOR SOCIAL SECURITY: Speaking about Social Security, The United States Congressional Budget Office has issued “The 2013 Long-Term Projections for Social Security: Additional Information.” Social Security is the federal government’s largest single program. Of the 58 million people who currently receive Social Security benefits, 70% are retired workers or their spouses and children, and another 11% are survivors of deceased workers; all of those beneficiaries receive payments through Old-Age and Survivors Insurance. The other 19% of beneficiaries are disabled workers or their spouses and children; they receive Disability Insurance benefits. In fiscal year 2013, Social Security’s outlays totaled $808 billion, almost one-quarter of federal spending; OASI payments accounted for 83% of those outlays, and DI payments made up 17%. Each year, CBO prepares long term projections of revenues and outlays for the program. The most recent set of 75-year projections was published in September 2013. This publication presents additional information about those projections. Social Security has two primary sources of tax revenues: payroll taxes and income taxes on benefits. Roughly 96% of those revenues derive from a payroll tax --generally, 12.4% of earnings -- that is split evenly between workers and their employers; self-employed people pay the entire tax. The payroll tax applies only to taxable earnings -- earnings up to a maximum annual amount ($113,700 in 2013). The remaining share of tax revenues – 4% is collected from income taxes that higher income beneficiaries pay on their benefits. Revenues credited to the program totaled $745 billion in fiscal year 2013. Revenues from taxes, along with intra-governmental interest payments, are credited to Social Security’s two trust funds, one for OASI and one for DI, and the program’s benefits and administrative costs are paid from those funds. Although legally separate, the funds often are described collectively as the OASDI trust funds. In a given year, the sum of receipts to a fund along with the interest that is credited on balances, minus spending for benefits and administrative costs, constitutes that fund’s surplus or deficit. In calendar year 2010, for the first time since the enactment of the Social Security Amendments of 1983, annual outlays for the program exceeded annual tax revenues (that is, outlays exceeded total revenues excluding interest credited to the trust funds). In 2012, outlays exceeded noninterest income by about 7%, and CBO projects that the gap will average about 12% of tax revenues over the next decade. As more members of the baby boom generation retire, outlays will increase relative to the size of the economy, whereas tax revenues will remain at an almost constant share of the economy. As a result, the gap will grow larger in the 2020s and will exceed 30% of revenues by 2030. CBO projects that under current law, the DI trust fund will be exhausted in fiscal year 2017, and the OASI trust fund will be exhausted in 2033. If a trust fund’s balance fell to zero and current revenues were insufficient to cover the benefits specified in law, the Social Security Administration would no longer have legal authority to pay full benefits when they were due. In 1994, legislation redirected revenues from the OASI trust fund to prevent the imminent exhaustion of the DI trust fund. In part because of that experience, it is a common analytical convention to consider the DI and OASI trust funds as combined. Thus, CBO projects, if some future legislation shifted resources from the OASI trust fund to the DI trust fund, the combined OASDI trust funds would be exhausted in 2031. The amount of Social Security taxes paid by various groups of people differs, as do the benefits that different groups receive. For example, people with higher earnings pay more in Social Security payroll taxes than do lower earning participants, and they also receive benefits that are larger (although not proportionately so). Because Social Security’s benefit formula is progressive, replacement rates -- annual benefits as a percentage of average annual lifetime earnings -- are lower, on average, for workers who have higher earnings. As another example, the amount of taxes paid and benefits received will be greater for people who were born more recently because they typically will have higher earnings over a lifetime, even after an adjustment for inflation. 
 
4. DETROIT BANKRUPTCY MAY NOT BE PRECEDENTIAL…AT LEAST IN CALIFORNIA: Lest California cities in, or considering, bankruptcy get too euphoric over the mileage they might get from the Detroit ruling on public employee pension rights, a check under the hood might be useful. An opinion piece in eionline.com points out that fifty years ago, Michigan changed its state constitution to grant public employees contract rights to their pensions in retirement. The state's employees thought that the change would be an ironclad way to protect their pensions against impairment, given the added state and federal constitutional protections afforded contracts. Instead, Michigan inadvertently exposed its public servants' pensions to the chop shop of federal bankruptcy courts, which are in the business of doing just what employees fear -- impairing contracts. And Michigan declined to go further in protecting pension plan participants' rights. Indeed, as the bankruptcy judge said in his Detroit ruling December 3, 2013, Michigan could have added additional protections for retirees (See C & C Special Supplement Newsletter for December 3, 2013). Detroit could even have explicitly required the state to guarantee pension benefits, but it did not. For that reason, it was pretty easy for the bankruptcy judge to conclude that since the only rights pension plan participants had were contract rights, they are subject to impairment in a federal bankruptcy proceeding.  But here is where California's vehicle for delivering pension benefits has a few options that might give its public pension plan participants better mileage in the long run. In California, retirees do not have a contract with their former public employers. They are not creditors of the municipalities for whom they once worked, they do not have claims against those municipalities. Further, unfunded liabilities on the books of the retirement fund are not even a debt, according to the California law.  The obligations owed to California retirees to pay their retirement benefits are owed by an independent public agency -- the retirement trust fund -- not by their former employer. That difference is by statutory design, not by contract. And the obligation owed by the employer to the pension trust fund is also not one of contract, but of statute. It was the exercise of the state of California of its governmental powers that created these statutory obligations, independent of any contractual rights and obligations between the employer and employee while in the employment relationship.  As a result, there can be no contract between a California retiree and a former employer that is in danger of impairment. And the federal bankruptcy courts may not interfere with the exercise of state political and governmental powers, under the 10th Amendment to the U.S. Constitution and Section 903 of the Bankruptcy Code. 
 
5. HOW MUCH WOULD IT TAKE TO ACHIEVE EQUIVALENCY BETWEEN DB ACCRUALS AND VOLUNTARY ENROLLMENT 401(k)s IN THE PRIVATE SECTOR?:  Over the past 30 years or so, the number of defined benefit pension plans has continued to decline, while defined contribution plans have increased. Some workers are covered both by DB and DC plans, while others are offered only a DC plan, and some have only a DB plan. Still others have no workplace retirement plan at all.  The rapidly growing public policy concern facing the United States is whether future generations of retired Americans, particularly those in the Baby Boomer and Gen X cohorts, will have adequate retirement incomes. There have been several policy studies in recent years that suggest the decreasing relevance of DB plans relative to DC plans since the 1980s will have a negative impact on the percentage of future retirees who will achieve a specified level of retirement income adequacy. In considering these shifts in plan availability and design, plan sponsors, providers and policy makers naturally look for comparisons in the outcomes provided, the benefits actually produced based on the application of real-world savings rates, employer contributions and worker tenure within these program designs. Unfortunately, comparisons are frequently limited by a paucity of real-world data. The December 2013 EBRI Issue Brief, computes for a number of simulated employee contingencies what level of final average DB accrual would provide an equal amount of retirement income at age 65 as would be produced if the projected sum of voluntary enrollment 401(k) and IRA rollover balances were annuitized. In so doing, it provides a comparison in median outcomes for a variety of assumptions, both market returns and annuity purchase prices, and should provide a much-needed reference point for policy makers in evaluating these plan designs in view of both current and future workforce trends.  The specific results showed that a DB plan would need to range between 1% and 3% of final compensation per year of participation in order to equal income generated by a DC plan.  Volume 34, No. 12.
 
6. ENLIGHTENED PERSPECTIVE BY ANDY ROONEY: I have learned...that to ignore the facts does not change the facts.
 
7.  CLEVER SIGNS: At a car dealership: “The best way to get back on your feet is to miss a car payment."
 
8. TODAY IN HISTORY: In 1933, FM radio is patented.

9. 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.
 
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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.


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