Category Archives: Benefits

The State of Local Government Pensions: A Preliminary Inquiry

Source: Tracy M. Gordon, Heather M. Rose, and Ilana Fischer, Lincoln Institute of Land Policy, Inventory ID WP12TG1, July 2012

From the abstract:
State government pensions have attracted considerable media and scholarly attention. Less well understood are the nation’s 3,196 locally administered plans. This paper represents a first step toward filling this gap. After reviewing issues common to state and local plans, it summarizes existing data and research on local pensions. Based on their own technical assumptions, local plans are as well funded as their statewide counterparts (Munnell et al., 2011). However, applying a lower discount rate and generalizing from the nation’s largest municipal plans (those with assets above $1 billion), researchers have estimated aggregate unfunded liabilities of $574 billion (Novy-Marx and Rauh, 2011). Results from an original news scan suggest that pensions are already burdening some local budgets. Key issues going forward will be determining how local government employee pension costs affect current municipal cash flows and whether pension funding status is capitalized in local property values.

Employer costs for defined benefit and defined contribution retirement plans

Source: U.S. Department of Labor, Bureau of Labor Statistics, The Editor’s Desk, December 26, 2012

Private industry employers now spend more per employee hour worked for defined contribution retirement plans (retirement plans that specify the level of employer contributions and place those contributions into individual employee accounts) than for defined benefit retirement plans (plans that provide employees with guaranteed retirement benefits that are based on a benefit formula). March 2012 private industry employer costs for defined contribution plans were 60 cents per employee hour worker, compared to 43 cents for defined benefit plans.

What are the Retirement Prospects of Middle-Class Americans?

Source: Barbara A. Butricia, Mikki D. Waid, AARP Public Policy Institute, January 2013

From the abstract:
Using The Urban Institute’s Dynamic Simulation of Income Model, Barbara Butrica and Mikki Waid project that workers today are less likely than their parents or grandparents to enjoy the living standards of their working years when they retire. Much of the projected decline is expected because health care costs are rising faster than wages. That is a central finding from this report from the Urban Institute and AARP’s Public Policy Institute, based on computer modeling of retirement prospects for middle-class workers under age 55 in 2012.
See also:

Measures of Retirement Benefit Adequacy: Which, Why, for Whom, and How Much?

Source: Vickie Bajtelsmit, Anna Rappaport, LeAndra Foster, Society of Actuaries, January 2013

From the summary:
The purpose of this study is to provide the basis for estimation of retirement income needs and adequacy. To that end, the researchers have developed a Monte Carlo simulation model of retirement cash flows incorporating a wide variety of risks and uncertainties faced by retirees, including longevity, inflation, investment, health, and long-term care. By varying assumptions, they compare outcomes based on decisions such as expense reduction, mortgage payoff, purchase of annuities and long-term care insurance, delayed and early retirement. They describe and justify the base case assumptions, explain the metrics used for reporting the simulation output, and summarize the alternative scenarios that are simulated. They also provide call -out boxes highlighting practical issues and key findings as well as a list of references that can be a handy source of resources on this topic.

The study describes three different approaches to measuring benefit adequacy from each stakeholder’s point of view as well as their limitations:
• Replacement Ratio – this is most often used by employers in not only designing their plans but also in comparing their plans to those of other employers. The study includes a discussion of the Aon /Georgia State Study, which is widely used and recognized in the U.S.
• Minimum Needs Measure – this is generally used by policymakers. The study uses the Elder Economic Security Index to outline national averages for various household types.
• Cash Flow Analysis – a detailed, personalized cash flow forecast is the best way for individuals to prepare for and manage their retirement needs.

The Retirement Breach in Defined Contribution Plans: Size, Causes, and Solutions

Source: Matt Fellowes, Katy Willemin, HelloWallet, January 2013
(registration required)

Well over half of U.S. employers use 401(k)’s and other defined contribution (DC) programs to encourage their employees to save for retirement, now collectively spending over $118 billion in match contributions and encouraging employees to save another $175 billion every year. Yet, over 25 percent of households that use a DC plan for retirement have withdrawn, or breached, their DC balances for non-retirement spending needs, amounting to over $70 billion in annual withdrawals. These trends challenge key legal and financial assumptions used to govern the DC retirement market …

…The findings indicate that employers are subsidizing an expensive retirement benefit that a large, and growing, share of workers do not use for retirement, signaling a broader misalignment between the advanced financial needs subsidized by employers and the basic, unmet financial needs of workers. Furthermore, because retirement plan breaching is not among the metrics reported by plan managers, this growing problem is largely invisible to employers sponsoring retirement benefits. Among our recommendations, we encourage employers and regulators to promote access to more personalized Total Rewards and talent management programs—with an increased focus on holistic money management needs —which more effectively align benefit spending with the actual benefit needs of their population. This will reduce costs for employers, improve worker engagement, and ultimately increase Rewards efficacy.

Exchanging Delayed Social Security Benefits for Lump Sums: Could This Incentivize Longer Work Careers?

Source: Jingjing Chai, Raimond Maurer, Olivia S. Mitchell, and Ralph Rogalla, Pension Research Council, Working Paper WP2012-21, October 2012

From the abstract:
Social Security benefits are currently provided as a lifelong benefit stream, though some workers would be willing to trade a portion of their annuity streams in exchange for a lump sum amount. This paper explores whether allowing people to receive a lump sum as a payment for delayed retirement rather than as an addition to their lifetime Social Security benefits might induce them to work longer. We model the factors that influence how people trade off a Social Security stream for a lump sum, and we also examine the consequences of such tradeoffs for work, retirement, and life cycle wellbeing. Our base case indicates that workers given the chance to receive their delayed retirement credit as a lump sum payment would boost their average retirement age by 1.5-2 years. This will interest policymakers seeking to reform the Social Security system without raising costs or cutting benefits, while enhancing the incentives to delay retirement.

Businesses Can Avoid the High Cost of Workplace Injuries by Offering Earned Sick Days

Source: Liz Ben-Ishai, Center for Law and Social Policy, January 2013

Add one more piece of evidence to the increasingly-difficult-to-ignore body of facts that suggests earned sick days – particularly for lower-wage workers – are crucial to our country’s economic success and families’ economic security. A new study by health economist J. Paul Leigh shows that the economic cost of workplace injuries among low-wage workers amounted to more than $39 billion in 2010. The high cost of workplace injuries among low-wage workers is particularly striking in light of recent research demonstrating that there is a significant correlation between lack of paid sick leave and the incidence of nonfatal occupational injuries. A study by Abay Asfaw and colleagues, released earlier this year, showed that workers with paid sick leave were 28 percent less likely than those without leave to be injured. Given that 80 percent of workers making very low wages have no access to paid sick leave, the need to heed these findings on workplace injuries and sick leave is urgent.
Numbers and Costs of Occupational Injury and Illness in Low-Wage Occupations
Source: J. Paul Leigh, Center for Poverty Research, and Center for Health Care Policy and Research, University of California Davis, December 2012

Paid Sick Leave and Nonfatal Occupational Injuries
Source: Abay Asfaw, Regina Pana-Cryan, and Roger Rosa, American Journal of Public Health, Vol. 102 No. 9, September 2012
(subscription required)

Pension Costs on DOD Contracts: Additional Guidance Needed to Ensure Costs Are Consistent and Reasonable

Source: United States Government Accountability Office, GAO-13-158, January 2013

From the summary:
Labor costs are included in the prices contractors negotiate with the Department of Defense (DOD), and include pension costs as these are a normal element of employee compensation. Contractors make two sets of calculations for their defined benefit pension plans, following two sets of standards: (1) Cost Accounting Standards (CAS), which determine how pension costs are allocated to government contracts; and (2) Employee Retirement Income Security Act of 1974 (ERISA), which establishes the minimum contribution required to fund plans. In 2008, revised ERISA rules altered the minimum funding requirements, causing CAS costs and ERISA contributions to diverge further apart. ERISA contributions have therefore greatly exceeded CAS pension costs reflected in contract prices. In December 2011, almost 4 years after ERISA changes took effect, the CAS Board, which is part of the Office of Management and Budget (OMB), made changes to CAS that harmonized them to ERISA in order to gradually reduce the difference between the two calculation methods.

DOD centralizes its technical expertise for management and oversight of defined benefit pension plans. DOD contracting officers at the corporate level negotiate pension costs with contractors and receive technical support from a team of DOD actuaries. DOD audits projected and actual costs for contracts, including pension costs, to ensure they are allowable, allocable, and reasonable. The Federal Acquisition Regulation requires that employee compensation, including pensions, be reasonable. However, the pension costs used for compensation reviews can be affected not only by the value of benefits earned by employees, but also by factors such as asset returns and interest rates. Also, oversight processes do not clearly assign responsibility for assessing the reasonableness of pension benefits, including those for executives….

… DOD contractors are among the largest sponsors of defined benefit pension plans in the United States and factor pension costs into the price of DOD contracts. Since the 2008 market downturn, these pension costs have grown—thereby increasing DOD contract costs—and recent changes in rules for calculating pension costs have raised the prospect of further cost increases. Given this possibility, GAO assessed how (1) contractor pension costs are determined; (2) DOD ensures the contractor pension costs it pays are appropriate; (3) DOD contractors’ defined benefit pension plans compare with plans sponsored by similar companies; (4) pension costs have affected DOD contract costs and the factors that contributed to these pension costs; and (5) the harmonization of CAS with ERISA will affect the amounts DOD will pay in pension costs in coming years. To do this, GAO analyzed defined benefit pension plans for the largest contractors; interviewed contractor and DOD officials; and reviewed relevant laws and regulations, including changes made to harmonize CAS with ERISA. …

Rethinking the Role of the Profession on Public Sector Compensation

Source: Thom Reilly, Public Administration Review, Volume 73 Issue 1, January/February 2013
(subscription required)

…Instead of constantly defending postretirement benefits and arguing that public sector employees are paid less than their private sector counterparts, I would like to suggest that the public administration profession take the lead in reforming public pay and benefits. If public managers, along with elected officials and employee and union groups, do not comprehensively address this issue, fed-up citizens will head to the ballot box, and their remedies will likely be much more punitive and draconian than any legislation or policy changes. Our field has been slow to lead in this area.

The field of public administration should be at the forefront, driving the reform agenda and discussion. I suggest four areas in which we could move in this direction.

-Transparency. Our field must insist on transparency in the adoption of public pay and benefits, including an independent analysis of the current cost of any pay or benefit increase, as well as how future costs will be paid for and managed.

-Shared pension (and retiree health care) costs. Similar to Social Society and defined contribution plans, there should be equal employee/employer contribution. Allowing public employees to take reduced pay increases in lieu of sharing in the cost of pensions is problematic and allows for a good deal of gamesmanship. If the pension rate goes up 2 percent and the employee gets a 3 percent cost-of-living adjustment, does that mean he or she would otherwise have gotten 5 percent? The reality is that in many jurisdictions, the public employer has largely picked up employee contributions. Courts have generally held that existing pension benefits are protected, but increasing existing employees’ contributions is generally permissible, which can significantly address a portion of the current underfunding.

-Hybrid and cash-balance pension plans. Our field should take the lead in designing hybrid plans that combine elements of existing defined-benefit plans with a new 401(k)-style system in which money is invested on behalf of the retiree. The Federal Employee Retirement System has adopted such a model. Under cash-balance plans, workers get an individual retirement account to which both the employee and the employer contribute while the employer guarantees a minimum return. These plans have the potential to increase active participation of public employees in retirement planning while transferring some of the risk away from the taxpayer. Moving public employees to these type systems will also allow portability of these benefits so that they can follow workers if they choose to switch jobs and move to the private or nonprofit sector or to another public sector job.

-Retirement security for all. Our field can use the increased national attention on public employee benefits to expand the conversation on the need for retirement security for all Americans. According to data from the Federal Reserve, U.S. Census Bureau, and Internal Revenue Service, 25 percent of American families have no savings at all, and the average amount saved for retirement is $35,000. Our nation is not adequately prepared to deal with this retirement security crisis….

Compensation Matters: The Case of Teachers

Source: Alicia H. Munnell and Rebecca Cannon Fraenkel, Center for Retirement Research at Boston College, State and Local Pension Plans, SLP#28, January 2013

From the key findings:
• Many public sector pension plans have recently cut pension benefits for new hires, thereby reducing compensation.
• The analysis looks at how such cutbacks could affect the quality of teachers.
• One proxy for teacher quality is the average SAT score at a teacher’s undergraduate institution.
• The analysis finds that school districts with higher wages and/or higher pensions are able to hire teachers from institutions with higher SAT scores.
• These results suggest that cutting compensation for new teachers is not costless, as it will likely reduce applicant quality.