Category Archives: Pensions

Protecting and Strengthening Retirement Savings

Source: J. Mark Iwry, David C. John, Brookings Institution, July 16, 2008

From the summary:
The topic of the Committee’s hearing today, “Saving Smartly for Retirement: Are Americans Being Encouraged to Break Open the Piggy Bank?”, reflects the dual aspect of this issue. Effective policy needs to focus both on saving — the accumulation of assets — and on the preservation of those assets to provide security in retirement. In fact, these two objectives are, to some degree, at odds with one another.

Accordingly, our testimony consists of two parts. First, as the Committee has requested, we address the issue of preservation of savings in 401(k) and similar employer-sponsored retirement plans (pages 2-14, below). Our testimony on this topic seeks to place the issue in a broader, relevant context; briefly summarizes certain recent efforts to limit pension “leakage,” and offers a number of recommendations.

The Efficiency of Pension Plan Investment Menus: Investment Choices in Defined Contribution Pension Plans

Source: Ning Tang and Olivia S. Mitchell, Michigan Retirement Research Center Research Paper No. WP 2008-176, June 2008

From the abstract:
Few previous studies have explored whether defined contribution retirement saving plans offer sufficiently diversified investment menus, though it is likely that these menus significantly shape workers’ accumulations of retirement wealth. This paper assesses the efficiency and performance of 401(k) investment options offered by a large group of US employers. We show that most plans are efficient compared to market benchmark indexes. Three performance measures underscore the fact that these plans tend to offer a sensible investment menu, when measured in terms of the menus’ mean-variance efficiency, diversification, and participant utility. The key factor contributing to plan efficiency and performance has to do with the types of funds offered, rather than the total number of investment options provided.

State and Local Government Pension Plans: Current Structure and Funded Status

Source: Barbara D. Bovbjerg, Government Accountability Office, GAO Report GAO-08-983T, July 10, 2008

From the abstract:
Millions of state and local government employees are promised pension benefits when they retire. Although these benefits are not subject, for the most part, to federal laws governing private sector benefits, there is a federal interest in ensuring that all American have a secure retirement, as reflected in the special tax treatment provided for private and public pension funds. Recently, new accounting standards have called for the reporting of liabilities for future retiree health benefits. It is unclear what actions state and local governments may take once the extent of these liabilities become clear but such anticipated fiscal and economic challenges have raised questions about the unfunded liabilities for state and local retiree benefits, including pension benefits. GAO was asked to report on (1) the current structure of state and local government pension plans and how pension benefits are protected and managed, and (2) the current funded status of state and local government pension plans. GAO spoke to a wide range of public experts and officials from various federal and nongovernmental entities, made several site visits and gathered detailed information about state benefits, and analyzed self-reported data on the funded status of state and local pension plans from the Public Fund Survey and Public Pension Coordinating Council. …….. . Many experts consider a funded ratio (actuarial value of assets divided by actuarial accrued liabilities) of about 80 percent or better to be sound for government pensions. We found that 58 percent of 65 large pension plans were funded to that level in 2006, a decrease since 2000 when about 90 percent of plans were so funded.
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Highlights

The Best Retirement Plan Ever

Source: Christian Weller, Center for American Progress, July 10, 2008

How Public Sector Pension Plans Provide Adequate Retirement Savings in an Efficient and Sustainable Way

CAPAF’s Christian E. Weller testifies today to the Joint Economic Committee. Read the full testimony.

A recent poll conducted by Bankrate Inc. found that only about 3 in 10 workers expect to have enough money to retire comfortably. Nearly 7 in 10 Americans have set low expectations about their retirement prospects. And one in five Americans say they are afraid they will never be able to retire.

A Tower of Tiers

Source: Jonathan Walters, Governing, May 2008

Pensions are getting less generous for a new generation of government workers. Will they tolerate equal work for unequal benefits?

Starting next July, public employees hired in the state of Kansas will be second-class citizens, in a way. They will have to pay more into the employees’ retirement fund than workers who came on board before them do. They’ll have to clock more years on the job in order to collect their pension. And when they do go on to retire, the new group of workers is set to receive less generous payouts than their brethren hired before July 1, 2009.

It’s not for spite that the future hires are getting a lesser deal. The reason is more straightforward than that. The Kansas pension system is $5.4 billion short of full actuarial health. By lumping the next generation of workers into a second “tier,” Kansas expects to take considerable pressure off the pension fund’s long-term finances. What’s more, since the workers getting nicked haven’t even accepted the job yet, there was no natural constituency to oppose the plan in the legislature.

The notion of dinging future hires in the name of pension health is nothing new — New York State began tiering its employees back in the early 1970s. But with retirees living longer, the stock market in flux and state and local budgets getting tighter, a growing number of states are tiering in the name of maintaining their pension funds. Just in the past three years, Arkansas, Colorado, Louisiana, Mississippi, North Dakota, Rhode Island and Texas have acted to create new classes of employees. For anyone about to go into government work in those states, retirement may be a little further out , and a little less sweet, than for those who toiled before them.

As Kansas found, tiering can make for an elegant political fix. That’s particularly true because state law in Kansas, as in many states, prohibits taking away benefits promised to existing employees. There’s evidence, however, that bifurcating pension benefits simply pushes pension conflict down the road. As the second tier’s ranks swell and gain in political power, those employees inevitably agitate to win back what they lost before starting to work.

Public Pension Investment Practices

Source: M. Corinne Larson, Government Finance Review, Volume 24, no. 1, February 2008

From the abstract:
A recent survey on public pension investment practices shows that many of the plans have active, sophisticated investment programs in place, and the trend is toward expanding the types of investments made. Therefore, finance officers involved with pension investing will need to understand increasingly sophisticated money management techniques.

Why Not a “Super Simple” Saving Plan for the United States?

Source: Pamela Perun, C. Eugene Steuerle, Urban Institute, May 23, 2008

From the abstract:
Despite decades of significant tax subsidies for pensions and retirement accounts, most Americans retire with little or no pension saving. This paper suggests that it is possible to create a “Super Simple” saving plan that would provide a basic, low-cost, easily administrable plan with the potential to increase significantly the retirement assets available to moderate- and middle-income individuals. This plan follows the lead of a new system about to be implemented in the United Kingdom, which features automatic contribution for employees who do not opt out, a significant government match, and simplification of existing rules amongst other elements.

“Why Don’t Some States and Localities Pay Their Required Pension Contributions?”

Source: Alicia H. Munnell, Kelly Haverstick, Jean-Pierre Aubry, and Alex Golub-Sass, Center for Retirement Research at Boston College, Issue in Brief, SLP #7, May 2008

The brief’s key findings are:
• Over 40 percent of plans in our sample failed to make their annual required contribution (ARC) in 2006.
• Two thirds of these plans faced legal constraints on their contributions, but many are gradually adjusting their limits.
• For the unconstrained plans, the following factors are associated with a failure to make the ARC:

o The plan uses a less rigorous cost method;
o The plan is large; and
o The plan is in a state with a relatively high debt burden.