Category Archives: Benefits

The Impact of Taxing Health Premiums

Source: Center for Retirement Research at Boston College, Squared Away blog, February 3, 2015

Excluding the health insurance premiums paid by employers and employees from workers’ taxable earnings is the federal government’s largest single tax expenditure, amounting to some $250 billion a year in lost revenue.

Eliminating the exclusions – as some in Washington have proposed – would sharply increase how much is taken out of workers’ paychecks for payroll taxes and for income taxes. But any such proposal would also put more money in their pockets when they retire by increasing the earnings base on which their Social Security benefits are calculated.

Urban Institute researchers Karen Smith and Eric Toder recently estimated the policy’s impact on workers’ taxes and benefits and found that it varied widely for different income groups and among people born in five different decades, the 1950s through the 1990s.
Adding Employer Contributions to Health Insurance to Social Security’s Earnings and Tax Base
Source: Karen E. Smith and Eric Toder, Center for Retirement Research at Boston College, WP#2014-3, April 2014
Executive Summary

Amazing Waste: Tax Subsidies to Qualified Retirement Plans

Source: Calvin H. Johnson, Tax Notes, Vol. 144, No. 727, 2014

From the abstract:
The proposal would repeal the tax advantages given to qualified retirement plans. Qualified plans are ineffective or counterproductive for their given rationales, which makes them a rich source of revenue when the United States needs money. Johnson argues that qualified plans provide a safety net where there is little need for it and provide no safety net where it is needed. Qualified plans are said to improve the value of a dollar by moving it from high-income working years to low-income retirement years. However, the tax advantages are distributed under a reverse-Robin Hood pattern to high income groups (many with soaring salaries) and by negating the tax brackets. That distribution of benefits can be expected to reduce the utility of a dollar. Qualified plans are said to be an incentive for savings, but when government cost and deficits are considered, the plans reduce net national savings. It would be cost free and effective to increase retirement savings by mandating savings for retirement by imposing default rules without a tax subsidy.

The proposal is offered as a part of the Shelf Project, a collaboration of tax professionals developing methods of raising revenue in ways that improve the fairness and efficiency of the tax base. Revenue raising is not on the political agenda, but inevitably it will be. The Shelf Project has 74 proposals so far.

Special Issue on Retirement Benefits for State and Local Employees: Designing Pension Plans for the Twenty-first Century

Source: Edited by Josh Rauh and Mark Duggan, Journal of Public Economics, August 2014
(subscription required)

Articles include:
Introduction to the Special Issue on Retirement Benefits for State and Local Employees: Designing Pension Plans for the Twenty-first Century

What makes annuitization more appealing?
John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian, Stephen P. Zeldes
We conduct and analyze two large surveys of hypothetical annuitization choices. We find that allowing individuals to annuitize a fraction of their wealth increases annuitization relative to a situation where annuitization is an “all or nothing” decision. Very few respondents choose declining real payout streams over flat or increasing real payout streams of equivalent expected present value. Highlighting the effects of inflation increases demand for cost of living adjustments. Frames that highlight flexibility, control, and investment significantly reduce annuitization. A majority of respondents prefer to receive an extra “bonus” payment during one month of the year that is funded by slightly lower payments in the remaining months. Concerns about later-life income, spending flexibility, and counterparty risk are the most important self-reported motives that influence the annuitization decision.

The effect of pension design on employer costs and employee retirement choices: Evidence from Oregon
John Chalmers, Woodrow T. Johnson, Jonathan Reuter
We use administrative data from Oregon’s Public Employees Retirement System (PERS) to study the effect of pension design on employer costs and employee retirement-timing decisions. During our 1990–2003 sample period, PERS calculates each member’s retirement benefit using up to three different formulas (defined benefit (DB), defined contribution (DC), and a combination of DB and DC), and PERS pays the maximum benefit for which the member is eligible. We show that this “maximum benefit” calculation results in average ex post retirement benefits that are 54% higher than if they had been calculated using only the DB formula and that employees receiving DC benefits are significantly more likely than employees receiving DB benefits to retire before the plan’s normal retirement age. Monte Carlo simulations verify that the higher costs could have been predicted at the start of our sample period. Exploiting exogenous plan changes, we show that employees respond to within-year variation in their retirement incentives and, consistent with peer effects, that they respond more strongly to these incentives when more of their coworkers face similar incentives. Finally, consistent with the emerging literature on financial mistakes by households, we show that a small but noteworthy fraction of retirees would have benefited from shifting their retirements by as little as one month.

Why do individuals choose defined contribution plans? Evidence from participants in a large public plan
Jeffrey R. Brown, Scott J. Weisbenner
We examine individual choices between a defined contribution (DC) and a defined benefit (DB) retirement plan at a large public employer. We find sensible patterns with regard to standard economic and demographic factors: the probability of choosing the DC plan decreases with the relative financial generosity of the DB plans versus the DC plan and rises with education and income. Using a survey of participants, we find that the ability to control for beliefs, preferences, and other variables not easily obtainable from administrative or standard household surveys increases the explanatory power over seven-fold. Among the important factors in the DB/DC pension choice are respondent attitudes about risk/return tradeoffs, financial literacy, return expectations, and political risk. We also find that individuals make sensible choices based on what they believe to be true about the plans, but that these beliefs about plan parameters are often wrong, thus leading to possibly sub-optimal decisions. Finally, we provide evidence that individuals’ preferences over plan attributes (e.g., the degree of control provided) are even more important determinants of the DB/DC decision than expected outcomes (e.g., the relative generosity of the plans).

Linking benefits to investment performance in US public pension systems
Robert Novy-Marx, Joshua D. Rauh
This paper calculates the effect that introducing risk-sharing during either retirement or the working life would have on public sector pension liabilities. We begin by considering the introduction of a variable annuity for the retirement phase in which positive benefit adjustments are granted each year only if asset returns surpass 5%. This change would reduce unfunded accrued liabilities by over half, and would lower the annual contribution increases required to target full funding in 30 years by 44%. Alternative measures that have similar effects on costs include increasing employee contributions by 10.3% of pay while keeping benefits unchanged; or giving employees a collective DC plan with an employer contribution of 10% of pay for future service. If there is a minimum guarantee that benefits cannot fall below their initial levels, the impact of introducing variable annuities is substantially smaller. We discuss these results in the context of models of lifecycle portfolio choice, and analyze the conditions under which lifecycle agents might receive utility gains from the implementation of variable annuities.

Reform of police pensions in England and Wales
Rowena Crawford, Richard Disney
We analyse pension reforms for police officers in England and Wales using force-level data. We quantify the impact on overall police pension plan liabilities, examining incidence across police officers, national and local taxpayers. We also examine reforms of retirement rules, especially concerning early retirement on grounds of ill-health. Differences in ill-health retirement across forces are statistically related to area-specific stresses of policing and force-specific human resource policies. Reforms in 2006 impacted primarily on the level of ill-health retirement among forces with above-average rates of early retirement. We find that residual differences in post-2006 ill-health retirement rates across forces are related to differential capacities to raise revenue from local property taxes.

Defined benefit pension plan distribution decisions by public sector employees
Robert L. Clark, Melinda Sandler Morrill, David Vanderweide
Studies examining pension distribution choices have found that the tendency of private-sector workers is to select lump sum distributions instead of life annuities resulting in leakage of retirement savings. In the public sector, defined benefit pensions usually offer lump sum distributions equal to employee contributions, not the present value of the annuity. Thus, for terminating employees that are younger or have shorter tenures, the lump sum distribution amount may exceed the present value of the annuity. We discuss the factors that may influence the choice to withdraw funds or not in this environment. Using administrative data from the North Carolina state and local government retirement systems, we find that over two-thirds of public sector workers under age 50 separating prior to retirement from public plans in North Carolina left their accounts open and did not request a cash distribution from the pension system within one year of separation. Furthermore, the evidence suggests many separating workers, particularly those with short tenure, may be forgoing substantial monetary benefits due to lack of knowledge, understanding, or accessibility of benefits. We find no evidence of a bias toward cash distributions for public employees in North Carolina.

Shrouded costs of government: The political economy of state and local public pensions
Edward L. Glaeser, Giacomo A.M. Ponzetto
Why do public-sector workers receive so much of their compensation in the form of pensions and other benefits? This paper presents a political economy model in which politicians compete for taxpayers’ and government employees’ votes by promising compensation packages, but some voters cannot evaluate every aspect of promised compensation. If pension packages are “shrouded,” so that public-sector workers better understand their value than ordinary taxpayers, then compensation will be highly back-loaded. In equilibrium, the welfare of public-sector workers could be improved, holding total public-sector costs constant, if they received higher wages and lower pensions. Centralizing pension determination has two offsetting effects on generosity: more state-level media attention helps taxpayers better understand pension costs, and that reduces pension generosity; but a larger share of public-sector workers will vote within the jurisdiction, which increases pension generosity. A short discussion of pensions in two decentralized states (California and Pennsylvania) and two centralized states (Massachusetts and Ohio) suggests that centralization appears to have modestly reduced pensions, but, as the model suggests, this is unlikely to be universal.

Importance of Supplemental Retirement Savings Plans for City and County Employees

Source: Robert L. Clark, Melinda Sandler Morrill, Matthew Anderson, and Aditi Pathak, Center for State and Local Government Excellence, January 2015

From the summary:
This brief is the final in a three-part series that analyzes employee participation in primary and supplemental retirement plans, retiree health care benefits, and Social Security in 20 large cities and counties across the country.

Key Findings:
– All 20 local government employers in the study offer their employees the opportunity to contribute to a supplemental retirement savings plan. The most frequently offered plan is a 457 plan.
– The characteristics of the primary retirement benefits are associated with the participation rates in supplemental plans.
– Workers covered by less generous primary pensions are more likely to contribute to voluntary supplemental retirement plans.
– City or county governments that give matching contributions, have multiple plans, and allow online enrollment also have higher participation rates in supplemental plans.
– Supplemental retirement savings plans provide local government workers with shorter career tenures with an important opportunity to build retirement wealth.

The Reality of the Retirement Crisis

Source: Keith Miller, David Madland, Christian E. Weller, Center for American Progress, January 26, 2015

From the summary:
When reviewing the data on how American workers are saving for retirement, two facts become abundantly clear:
∙ Millions of Americans are in danger of not having enough money to maintain their standard of living in retirement.
∙ The problem is getting worse over time.

The consequences of these growing savings shortfalls could be severe for both American families and the national economy, as a large share of households may be forced to significantly reduce consumption in retirement and will have to rely heavily on their families, charities, and the government for help to make ends meet. Rather than staying in control of their economic lives, millions of Americans may be forced to muddle through their final years partially dependent on others for financial support and to accept a standard of living significantly below that which they had envisioned.

This issue brief will illustrate the reality of this crisis by first looking at what the data have to say about how much money Americans are putting away for retirement. It will then evaluate the results of studies that use complex modeling to estimate what percentage of the population is at risk of falling short of achieving a financially stable retirement. What is made clear is that no matter how households’ needs in retirement are projected or how their incomes, assets, and debts are measured, an unacceptably large share of Americans appears at risk of being forced into a lower standard of living in retirement. The most convincing estimates of the share of households who will have insufficient assets stand at slightly more than 50 percent. But even more sobering is the fact that the most optimistic studies still find that nearly one-quarter of retirees are falling short.

Build your own pension plan: An interactive tool for public pension policy

Source: Ben Southgate, Urban institute, Metro Trends blog, January 28, 2015

Over the past half decade, many states and municipalities have been tinkering with the retirement benefits they offer government employees. These changes consist primarily of raising mandatory employee contributions to the retirement plan and trimming cost-of-living adjustments for retirees.

It’s clear that these reforms have successfully cut costs—their primary goal—but how have they affected future retirement security for public-sector workers and the distribution of benefits across the workforce? Have these reforms made it more difficult for young employees who change jobs frequently to accumulate retirement benefits? Do they reward work at older ages? Are there better ways to reform state and local pension plans?

Our new interactive public pension tool has the answers. It allows you to design your own pension plan and see how employees would fare.

Dependent care reimbursement accounts and workplace-funded childcare access

Source: U.S. Bureau of Labor Statistics, TED: The Economics Daily, January 26, 2015

In 2014, 54 percent of state and local government workers and 36 percent of private industry workers had access to dependent care reimbursement accounts. Only 13 percent of state and local government workers and 10 percent of private industry workers had access to workplace-funded childcare.

Understanding health plan types: What’s in a name?

Source: Bonita Briscoe, U.S. Bureau of Labor Statistics (BLS), Beyond the Numbers, Pay & Benefits, Vol. 4 no. 2, January 2015

Every year, many employers conduct an open season to let employees select or change their medical plans. Several factors may affect their selection, including choice of care provider and shared cost. Employees can sort out some of these distinctions by identifying the type of plan, but some plan names are unclear, such as “standard medical,” “basic medical,” and “traditional medical plan.” Can employees guess plan types based on such names? Even more specific names like “preferred plan” and “point-of-service plan” might not tell how the plan works.

Plan names may reveal some, but not complete, information. If it’s an indemnity plan, what kind? Is that HMO traditional, or open-access? With many plan names so vague, how can we figure out their type? Since the Bureau of Labor Statistics (BLS) began reporting on medical plans over 30 years ago, it has identified them by type. Of course, plans have changed quite a bit in 30 years. Today, BLS classifies medical plans into six types:
• Fee-for-service plan. A plan that gives participants the same reimbursement no matter what hospital or care provider they choose.
• Preferred provider organization. A plan that contracts with medical providers, such as hospitals and doctors, to create a network. Patients pay less if they use providers who belong to the network, or they can use providers outside the network for a higher cost.
• Exclusive provider organization. A plan comprising groups of hospitals and doctors that contract to provide comprehensive medical services. Patients receive coverage only for services from those providers (except in an emergency).
• Point-of-service plan. Such plans typically have differing coverage levels, based on where service occurs. For example, the plan pays more for service performed by a limited set of providers, less for services in a broad network of providers, and even less for services outside the network.
• Health maintenance organization. A plan that provides prepaid comprehensive medical care. HMOs both insure and deliver services, and patients usually live within a limited area and must get their nonemergency services within the network (except in an emergency).
• Open-access HMO. An HMO that covers nonemergency care outside its network for an extra cost.
This issue of Beyond the Numbers explores how the BLS National Compensation Survey (NCS) uses plan features to identify these six medical plan types.

Defined benefit pension decline: the consequences for organizations and employees

Source: Ebony de Thierry, Helen Lam, Mark Harcourt, Matt Flynn, Geoff Wood, Employee Relations, Vol. 36 no. 6, 2014
(subscription required)

From the abstract:
Purpose – The purpose of this paper is to use the theoretical and empirical pension literatures to question whether employers are likely to gain any competitive advantage from degrading or eliminating their employees’ defined benefit (DB) pensions.

Design/methodology/approach – Critical literature review, bringing together and synthesizing the industrial relations, economics, social policy, and applied pensions literature.

Findings – DB pension plans do deliver a number of potential performance benefits, most notably a decrease in turnover and establishment of longer-term employment relationships. However, benefits are more pronounced in some conditions than others, which are identified.

Research limitations/implications – Most of the analysis of pension effects to date focuses primarily on DB plans. Yet, these are declining in significance. In the years ahead, more attention needs to be paid to the potential consequences of defined contribution plans and other types of pension.

Practical implications – In re-evaluating DB pensions, firms have tended to focus on savings made through cost cutting. Yet, this approach tends to view a firm’s people as an expense rather a potential asset. Attempts to abandon, modify, or otherwise reduce such schemes has the potential to save money in the short term, but the negative long-term consequences may be considerable, even if they are not yet obvious.

Originality/value – This paper is topical in that it consolidates existing research evidence from a number of different bodies of literature to make a case for the retention of DB pension plans, when, in many contexts, they are being scaled back or discarded. It raises a number of important issues for reflection by practitioners, and highlights key agendas for future scholarly research.

Access to dependent care reimbursement accounts and workplace-funded childcare

Source: Eli R. Stoltzfus, U.S. Bureau of Labor Statistics, Beyond the Numbers, Pay & Benefits, Vol. 4 No. 1, January 2015

The U.S. labor force includes many working mothers and working fathers with dependents and children in their care. These families often enlist help, such as daycare or eldercare, to balance family and work responsibilities. But many families find it challenging to pay for the high costs of care for dependents and children. That’s where benefits such as dependent care reimbursement accounts and workplace-funded childcare can prove helpful to working families.

This issue of Beyond the Numbers takes a look at dependent care reimbursement accounts and workplace-funded childcare, and the rate of worker access to each of these benefits. The data show the employee access rates in 2014 for selected occupational and establishment characteristics for state and local government workers and for private industry workers.