Source: National Association of State Retirement Administrators (NASRA), Issue Brief, February 2015
From the introduction:
State and local government pension benefits are paid not from general operating revenues, but from trust funds to which public retirees and their employers contributed while they were working. On a nationwide basis, pension contributions made by state and local governments account for roughly 3.9 percent of direct general spending. Current pension spending levels, however, vary widely and are sufficient for some entities and insufficient for others.
In the wake of the 2008-09 market decline, nearly every state and many cities have taken steps to improve the financial condition of their retirement plans and to reduce costs although some lawmakers have considered closing existing pension plans to new hires, most determined that this would increase — rather than reduce — costs, particularly in the near-term. Instead, states and cities have made changes to the pension plan by adjusting employee and employer contribution levels, restructuring benefits, or both. Generally, adjustments to pension plans have been proportionate to the plan’s funding condition and the degree of change needed.
Source: Monique Morrissey, Economic Policy Institute, Briefing Paper #390, March 5, 2015
Although benefit cuts, increased employee contributions, and a rebound in stock prices have improved pension fund finances, severe underfunding remains a challenge in places where the problem predated the recession and was the result of lawmakers neglecting to make required contributions over many years.1 This is helping to sustain the idea that we can no longer afford to provide teachers, police, firefighters, and other civil servants with secure defined-benefit pensions.
Earlier would-be reformers pushed for 401(k)-style defined-contribution (DC) plans prevalent in the private sector. But disastrous results in West Virginia, Michigan, and Alaska have shifted attention to “hybrid” plans, such as cash balance plans, that combine elements of defined-benefit and defined-contribution systems. Advocates of these types of plans say they are a compromise between those who want to maintain traditional pension plans and those who push for a transition to a 401(k)-style system. However, DC and hybrid plans, which can collectively be referred to as account-type plans, fail on three important points:
· They do not help states save money. Traditional defined-benefit pensions are more efficient than DC plans and most hybrid plans due to economies of scale, risk pooling, and other factors. Moreover, changing plan type introduces transition costs. Thus, it is not surprising that states that switched to DC and hybrid plans did not save money except to the extent that they simply cut benefits or required workers to contribute more toward their retirement.
· They create more workforce management problems than they solve. For example, many cash balance plans provide the biggest benefits to job leavers, promoting high turnover in public-sector jobs, which require a high level of skill and experience.
· They increase retirement insecurity. Account-type plans introduced around the country threaten the retirement security of young and old alike. While a well-designed hybrid plan could theoretically help younger workers without undermining the retirement security of midcareer and older workers, none of the plans offered in the current political climate has done so.
Source: Jon R. Gabel, Heidi Whitmore, Jennifer L. Satorius, Jeremy Pickreign, and Sam T. Stromberg, Health Affairs, vol. 34 no. 3, March 2015
From the abstract:
National statistics on the cost and provisions of collectively bargained health plans show them to have similar single premiums, but lower family premiums, compared to employer-based plans not subject to collective bargaining. Union members contribute 4 percent and 6 percent of the cost of their premiums for single and family coverage, respectively, versus 18 percent and 29 percent for workers in employer-based plans. Cost sharing in collectively bargained plans is considerably less than in employer-based plans; coverage for prescription drugs is similar.
Source: Howard Risher, Compensation Benefits Review, Vol. 46 no. 5-6, October/December 2014
The BLS data show it is a mistake to generalize or to make assumptions. It is also a mistake to rely loosely on averages.
With the cost of benefits now in excess of 40% of base pay—based on misleading averages—market pay analyses that ignore benefits can lead to invalid conclusions. It would be advantageous to assemble better survey data on the prevalence and value of benefits.
A related issue is the pressure to increase the minimum wage. The workers who will be affected by any increase are in many companies the same individuals who are seeing their benefits reduced. The loss of benefits should be factored into future research on comparative income levels.
Finally, when baby boomers retire today, they often can count on the income from a vested defined benefit. Increasingly tomorrow’s retirees will have to rely on the funds in a defined contribution plan. The data suggest many will not have adequate funds to sustain their lifestyle. There will be a growing number who decide they cannot afford to retire. For those in lower job levels their only source of income could be Social Security and typically part-time employment income.
At the macro level, these trends may not be sufficiently material to affect the conclusions from analyses similar to Piketty’s. However, for the micro analyses central to assessing a company’s total compensation levels, the trends are directly relevant.
Source: Josh Verne, Compensation Benefits Review, Vol. 46 no. 5-6, October/December 2014
From the abstract:
Employers of all sizes need to make financial wellness a priority in 2015. Over the past couple years, we have seen some really inspiring trends in the areas of physical and mental health. Companies are implementing healthy eating initiatives, allowing fitness breaks, and offering 24-hour mental health hotlines. These programs are gaining popularity as more organizations realize that healthy employees are happier, more productive, and cost less. The remaining and possibly most costly concern is their financial wellness. Both employees and employers realize gains when financial stress is reduced.
Source: John G. Kilgour, Compensation Benefits Review, Vol. 46 no. 5-6, October/December 2014
From the abstract:
The Pension Protection Act of 2006 changed the way in which the value of lump sum distributions is calculated. When the new method was fully implemented in 2012, it triggered a flood of de-risking activity by sponsors of defined benefit pension plans via one-time lump sum distributions, group annuity contracts with insurance companies and liability driven investing. Underlying these developments were a number of economic and demographic factors including a rising equity market, low interest rates, increased Pension Benefit Guaranty Corporation insurance premiums and a declining number of active participants. These forces are still there. Indeed, they have strengthened due to recent legislation (MAP-21 in 2012, BBA in 2013 and HATFA in 2014). In addition, a number of legal questions have been resolved by the Verizon Communications decision of 2014 and new mortality tables have just been published by the Society of Actuaries. The combination of these developments indicate that 2015 will be another big year for pension plan sponsors to transfer pension risk to participants through lump sum distributions and to insurance companies through group annuity contracts.
Source: David Sirota, In These Times, Web Only, February 27, 2015
If we don’t strengthen oversight over investments like private equity now, we could have a disaster on our hands in the not-so-distant future.
Source: Anne Marie Zaletel and Kristina Launey, Employee Relations Law Journal, Vol. 40 no. 4, Spring 2015
This article discusses California’s Health Workplaces, Healthy Families Act of 2014, which requires that employers provide nearly all California employees with three paid sick days per year.
Source: Kristen Monaco, U.S. Bureau of Labor Statistics (BLS), Beyond the Numbers, Pay & Benefits, Vol. 4 No. 4, February 2015
From the summary:
Short- and long-term disability insurance programs replace some of the wages lost by people who cannot work because of a disabling injury or illness that is not work-related. Short-term disability insurance typically covers periods lasting less than 6 months, and long-term disability insurance lasts for the length of the disability or until retirement.
Those workers who are unable to work due to injury or illness and who do not have disability insurance coverage through their employers may seek benefits from Social Security Disability Insurance (SSDI). The number of SSDI claimants has grown over the past decade as younger workers and those in relatively low-skill, low-pay jobs have applied for benefits. This has prompted interest in the amount of coverage for workers in employer-provided disability insurance programs. This issue of Beyond the Numbers examines trends in employer-provided disability insurance coverage over time, explains the basic terms of coverage for typical plans, and estimates the costs to private employers.
Source: Center for State and Local Government Excellence, February 2015
From the abstract:
These case studies examine the public pension systems in four states with a long tradition of being well-funded to determine what successful practices they have in common.
The Center for State and Local Government Excellence examined the public pension systems in four states with a long tradition of being well-funded to determine what they have in common. The plans studied are: Delaware Public Employees’ Retirement System, Illinois Municipal Retirement Fund, Iowa Public Employees’ Retirement System, and North Carolina Retirement Systems.
While each of the defined benefit plans has a unique history and legal framework, they share these practices:
– a commitment to fund the annual required contribution in both good and bad financial times;
– conservative, realistic assumptions that are adjusted based on experience; and
– changes to benefit levels and contribution rates as needed.
The funded ratio for the plans studied ranges from 87.6 percent to 99.8 percent.