Category Archives: Pensions

'After' Math: The Impact and Influence of Incentives on Benefit Policy

Source: Nevin Adams, Employee Benefit Research Institute (EBRI), EBRI Issue Brief, No. 374, August 2012

From the abstract:
[T]he next Congress will, of necessity, address issues . . . proposals to modify or reduce existing tax preferences for health and retirement benefits. In that context, EBRI’s 70th policy forum focused on a range of topics, from tax policy and design incentives, to international trends and current drawdown rates, and how they might influence, and be impacted by, future events. This paper recaps the presentations and panel discussions at that event. Among the key points made at the policy forum:

– As important as retirement and health benefits are to Americans’ short- and long-term economic security, the sheer size of their tax preferences makes them vulnerable in the battles over deficit reduction and tax reform. Private-sector health benefits alone rank as the largest single “tax expenditure” in the federal budget.
– Retirement benefits are a tax deferral rather than an exclusion from income — meaning the federal government will eventually recoup the forgone revenue. This distinguishes retirement plan deferrals from other tax exclusions.
– Because the tax expenditure on 401(k)-type plans is a deferral, rather than an exclusion, reducing the tax expenditure in the current period also reduces the positive stream of revenue in the future.
– The biggest difference between tax-expenditure estimates and revenue estimates for scoring tax reform is that the latter incorporates taxpayer behavior; tax expenditure estimates do not.
– Ten percent or fewer of those ages 55-60 are making withdrawals from their IRA, compared with 80 percent of those 71 and older.
– On a historical basis, depending on the period measured, pre-retiree balances in defined contribution retirement plans double about every eight to nine years.
– Employer match levels seemed to have a bigger impact on older workers, but automatic enrollment seems much more significant in terms of getting younger employees to participate in retirement plans.
– Common challenges for underfunded retirement systems worldwide include the need to increase the state pension age and/or “normal” retirement age for full benefits; to promote higher labor-force participation at older ages; to encourage or require higher levels of private saving; to increase retirement coverage of employees and/or the self-employed; and to reduce savings “leakage” prior to retirement.

The Pension Coverage Problem in the Private Sector

Source: Alicia H. Munnell, Rebecca Cannon Fraenkel and Joshua Hurwitz, Center for Retirement Research at Boston College, IB#2012-16, September 2012

The brief’s key findings are:
– Only 42 percent of private sector workers age 25-64 have any type of pension coverage in their current job.
– This coverage gap creates two types of problems:
More than a third of households end up at retirement with only Social Security.
Workers who move in and out of coverage accumulate only modest amounts in their 401(k)s.
– Simplifying pension plans has not solved the coverage problem.
– Recently, both federal and state policymakers have put forth proposals to cover the uncovered.
– But given the low level of Social Security benefits and modest 401(k) balances, any new tier should be universal.

2011 Annual Survey of Public Employment & Payroll

Source: U.S. Census Bureau, August 23, 2012

From the press release:
In March 2011, there were 16.4 million full-time equivalent employees working in state and local governments in the U.S., down 1.4 percent from 2010. According to estimates released today by the U.S. Census Bureau, the majority of these employees (8.9 million) worked in education, followed by those working in hospitals (964,381), police protection (923,951) and corrections (717,940).

These estimates come from the 2011 Annual Survey of Public Employment & Payroll. The survey shows totals for state and local government full-time and part-time employment and details employment by government function at the national and state level. To arrive at the full-time equivalent employee calculation, the number of full-time employees is added to the number of hours worked by part-time employees divided by the standard number of hours for a full-time employee.

Related:
Public Employment and Public Pensions: A 20-Year Comparison
Source: Erika Becker-Medina and Paul Reyes, United States Census Bureau, Random Samplings blog, August 26, 2013

Physical Job Demand and Early Retirement

Source: Sepideh Modrek, Mark Cullen, Working paper, presented at 4th Annual Joint Conference of the Retirement Research Consortium, August 2-3, 2012

In this study we explore whether higher physical job demand predicts earlier (normal) retirement once we account for health and wealth. We then examine whether the timing of pension eligibility, which is determined by tenure and age, is more important in inducing retirement for those with more physically demanding jobs. Finally, we examine whether pension payouts or wealth accumulation induces retirement differentially for those with more physically demanding jobs….. Our study relies on an extraordinarily rich administrative data source from a large multi-site aluminum-manufacturing employer, Alcoa. …Those in the lowest demand jobs are estimated to work 16% longer relative to those in the medium demand, and those in high demand jobs retire 17% earlier relative to the medium demand group. We also find that that recent injury history is associated with earlier retirement. Finally, while we find evidence of a strong ‘pull’ effect of pension eligibility, pension payouts and 401K-wealth accumulation, there is limited evidence of a difference by job demand, though we find that those in physically demanding jobs who participate in the 401K schemes retire earlier.
Related:
Hard Labor Spells Earlier Retirement
Source: Boston College, Center for Retirement Research, Financial Security Project, Squared Away Blog, August 14, 2012

End of Retirement

Source: Donald L. Barlett and James B. Steele, Investigative Reporting Workshop, August 12, 2012

Pensions were once an integral part of the American dream, a pledge by corporations to their employees: For your decades of work, you can count on retirement benefits. Not everyone had a pension, but from the 1950s to the 1980s, the number of workers who did rose steadily — until 1985. Since then, more and more companies have walked away from pensions. Before today’s workers reach retirement age, decisions by Congress favoring moneyed interests will drive millions of older Americans — most of them women — into poverty and push millions more to the brink.

2011 Annual Survey of Public Pensions: State-Administered Defined Benefit Data

Source: U.S. Census Bureau, August 9, 2012

From the press release:
The nation’s state-administered defined benefit retirement systems totaled $2.5 trillion in cash and investment holdings in 2011, a 14.6 percent increase from $2.2 trillion in 2010, according to new statistics from the U.S. Census Bureau. Earnings on investments were $410.6 billion, up from $291.1 billion in 2010. These statistics come from the 2011 Annual Survey of Public Pensions: State-Administered Defined Benefit Data, which provides an annual look at the financial activity and membership information for the nation’s 222 state-administered public-employee retirement systems, including revenues, expenditures, investment holdings, membership and beneficiaries. Statistics are shown for the nation and individual states. This information includes actuarial liability statistics, which project the total obligation required to cover costs for providing pensions to former and present employees.

See also:
Summary Report
Source: Erika Becker-Medina, U.S. Census Bureau, G11-ASPP-ST, August 2012

When a Promise Isn't a Promise: Public Employers' Ability to Alter Pension Plans of Retired Employees

Source: Gavin Reinke, Vanderbilt Law Review, Vol. 64 no. 5, 2011

This Note analyzes the permissibility, under the U.S. Constitution, of public employee pension reforms that alter the amount of benefits to which retired employees are entitled, and proposes a solution to ensure the continued solvency of state public employee pension funds. Part II examines the underlying causes of the current pension crisis. Part III discusses current state attempts to reduce the pension benefits of retired public employees and explains the legal challenges to these reforms that are currently pending in state courts. Part IV analyzes the legal claims in more detail and explores whether pension reforms that reduce benefits for retired public employees violate substantive due process, the Takings Clause, or the Contracts Clause of the U.S. Constitution. Part V proposes that Congress encourage states to enact minimum funding requirements, similar to those in the Employee Retirement Income Security Act of 1974 (“ERISA”) that govern private employee pensions, by allowing states that choose to adopt such requirements to issue tax-exempt bonds for the purpose of funding public employee pensions.

Legal Constraints on Changes in State and Local Pensions

Source: Alicia H. Munnell and Laura Quinby, Center for Retirement Research at Boston College, Issue Brief, State and Local Pension Plans, SLP#25, August 2012

From the summary:
The brief’s key findings are:
– In responding to pension shortfalls, most states are legally constrained from reducing future benefits for current workers.
– These constraints make it difficult to adjust to changing conditions and to share the burdens of reform fairly between new and current participants.
– The legal boundaries for pension benefits are typically defined under a contracts-based approach rather than a constitutional provision.
– Narrowing the contract definition to when the worker performs the service would still protect benefits earned to date, while allowing adjustments to future benefits.

State Pension Systems on the Rebound

Source: Jennifer Burnett, Capitol Ideas, Vol. 55 no. 4, July/August 2012

Things are starting to look up for state pension systems…. Economic conditions in general have been improving, especially on Wall Street, which is closely tied to the financial health of public retirement systems. Corporate stocks and bonds make up more than half of all cash and investment holdings for state and local public employee retirement systems.
But the improved health of pensions isn’t just because investment markets are on the rebound; states have taken decisive action that also has helped the ailing systems…. Those reforms include higher employee contributions, a higher age or more years of service to qualify for retirement, and reductions in cost-of-living adjustments, or COLAs, for future or existing public employees….