Category Archives: Retirement

Effects of Pension Plan Changes on Retirement Security

Source: Danielle Miller Wagner, Joshua Franzel, Elizabeth Kellar, Amy Mayers, Bonnie Faulk, Alex Brown, Keith Brainard, Jeannine Markoe Raymond, Dana Bilyeu, and Ady Dewey, Center for State and Local Government Excellence and National Association of State Retirement Administrators, April 2014

Key findings:
– Pension reforms reduced the amount of retirement income new employees can expect to receive compared with that of existing employees. Reductions ranged from less than 1 percent to 20 percent.
– New employees can expect to work longer and save more to reach the benefit level of previously hired employees.
– Hybrid plans adopted in five states produce a wide range of estimated retirement incomes. Holding investment returns constant, the determining factor in the size of the hybrid benefit is employee and employer contributions. For this analysis those states with higher required contributions produce a higher benefit than those whose statutory contribution rates are lower.
– Changes to retirement plans include an increase in the number of years included in the final average salary calculation (21 states); a reduction in the multiplier (12 states); and a change to both of these variables (nine states).

The report calculates the retirement income that state and local employees hired under the new benefit conditions can expect, and compares it with the retirement income they would have earned before the plan was changed. The report was produced with financial support from AARP.

Since 2009, 45 states have responded to fiscal constraints by making significant changes to their retirement plans, including increasing employee contributions, reducing benefits, or both. Other states have modified their plan design, choosing to transfer more of the risk associated with providing retirement benefits from the state and its political subdivisions to its employees.

The report also summarizes interviews conducted with public sector human resource executives and retirement experts from 10 states that have made significant pension plan changes (Alabama, California, Colorado, Hawaii, Missouri, Ohio, Pennsylvania, South Carolina, Tennessee, and Virginia).

Although newly hired employees will need to work longer or save more to have the level of retirement benefit that employees previously earned, state human resource officials say that wage stagnation and the increased cost of benefits for employees is a more immediate concern. To address the savings gap, many plan administrators are providing enhanced

The Hidden Nature of Executive Retirement Pay

Source: Robert J. Jackson Jr., Colleen Honigsberg, Columbia Law and Economics Working Paper No. 475, February 2, 2014

From the abstract:
There are two competing theories of why public companies pay executives generous retirement benefits. One is that retirement pay is easier to hide from shareholders than other forms of compensation. The other is that retirement benefits align executives’ interests with those of long-term creditors, since the executives may not receive their payouts if the firm goes bankrupt. The latter view depends on the assumption that retirement benefits put executives in a similar contractual position as the company’s creditors. Yet no previous work has tested that assumption.

This Article provides the first systematic study of the contractual structure of executive retirement payouts. Using retirement pay data for thousands of executives, we show that a large proportion of executives link the value of their payouts to the company’s stock price and receive the bulk of these payouts immediately following their departure — features that contradict the incentive-alignment theory of retirement pay. The evidence also shows that the full amount and structure of retirement pay are undisclosed — findings consistent with the camouflage theory. While the structure of some executives’ payouts can be reconciled with the incentive-alignment theory, current rules do not give investors the information they need to tell the difference between payouts that align incentives and those that camouflage compensation. Lawmakers should require companies to reveal the magnitude and structure of these payouts, and neither regulators nor commentators should assume that retirement benefits suppress top managers’ appetite for risk.

Walking a Tightrope: Are U.S. State and Local Governments on a Fiscally Sustainable Path?

Source: Bo Zhao and David Coyne, Federal Reserve Bank of Boston, Working Paper No. 13-18, December 2013

From the abstract:
This paper develops a new measure of state and local fiscal sustainability called the “trend gap,” which is based on socioeconomic and other fundamental factors and removes the short-term influence of the business cycle. The paper estimates the trend gap and finds that the nationwide per capita trend gap has been on a growing path over the past three decades, a different conclusion than found in previous studies. Social insurance and income maintenance programs have played a major role in the growth of the trend gap, while pension and other post-employment benefits (OPEB) plans have become increasingly important in driving it up. In addition, there are large and growing disparities in the trend gap across states.

Our Inequality: An Introduction

Source: Colin Gordon, Dissent, March 6, 2014

This series is adapted from Growing Apart: A Political History of American Inequality, a resource developed for the Project on Inequality and the Common Good at the Institute for Policy Studies and inequality.org. It is presented in nine parts. This introduction lays out the basic dimensions of American inequality and interrogates the usual explanatory suspects. The next eight parts will develop a political explanation for American inequality, looking in turn at labor relations, the minimum wage and labor standards, job-based benefits, social policy, taxes, financialization, executive pay, and macroeconomic policy.

Articles include:
· The Union Difference: Labor and American Inequality
· The Bare Minimum: Labor Standards and American Inequality
· The Perils of Private Welfare: Job-Based Benefits and American Inequality
· A Tattered Safety Net: Social Policy and American Inequality

Employer-sponsored benefits extended to domestic partners

Source: Elizabeth Ashack, Beyond the Numbers, Pay & Benefits, Vol. 3 no. 6, March 2014

….This issue of Beyond the Numbers looks at the frequency with which health and defined-benefit plans are available to unmarried opposite-sex and same-sex domestic partners. The availability of benefits is referred to as access to benefits and in these data it is expressed as (1) the percentage of workers whose employers extend benefits to certain family members, and (2) the percentage of workers covered by a plan that allows benefits to be extended to certain family members. These data focus on whether benefits are available to unmarried family members (not whether they make use of the benefits); the survey does not include a question about the number of family members nor does it inquire about family relationships….

Executive Retirement Benefits: Survey of Executive Retirement Benefit Practices

Source: Towers Watson, Benefits Data Source, February 2014

From the summary:
– On average, executive benefit plans deliver an additional 5% to 7% of earnings in annual retirement income to a mid-level executive.
– About half of organizations that sponsor employer-paid nonqualified plans offer only pure restoration executive benefits.

Supplemental Retirement Plans Offered by City and County Governments

Source: Robert L. Clark, Melinda Sandler Morrill, Matthew Anderson, and Aditi Pathak, Center for State and Local Government Excellence, Issue Brief, February 2014

From the summary:
– Fifteen of the local government employers offer only one type of plan; all 20 local government employers in the study offer at least one 457 savings plan.
– Most plans allow loans.
– Employers match employee contributions in just four plans.
– Employees need more financial literacy and good information about plans to make optimal decisions when they have more choices to make.
– More choices for employees may not be better if the quality of the plans, in terms of fees and investment options, is inferior to the quality of a more restricted access model.

Using Automatic Escalation in Public Sector Retirement Plans to Increase Savings

Source: Paula Sanford, Center for State and Local Government Excellence, Issue Brief, March 2014

From the summary:
This brief looks at how automatic escalation features can help public employees save more for retirement, and the challenges and opportunities state and local governments may encounter as they consider automatic escalation policies.

As states and localities continue to modify their retirement packages, public employees may need to save more to ensure that they have an adequate retirement income.

This is the first study to examine automatic escalation options for public sector retirement plans and supplemental defined contribution plans.

Using interviews, case studies, and a review of academic and practitioner research, the brief offers recommendations on how governments might incorporate an automatic escalation policy into their defined contribution retirement plans, including:
– Ensure that employee groups are part of the process in working with elected and appointed leaders who support an automatic escalation policy.
– Acknowledge that there is no uniform approach to automatic escalation policies. The policy should reflect a government’s unique workforce preferences and policy environment.
– Reduce or eliminate as many barriers to enrollment as possible.
– Communicate with employees about the benefits of the feature when it is adopted.
– Consider implementing it in conjunction with other features, such as automatic enrollment.

The report also includes case studies of successful implementation of automatic escalation in supplemental defined contribution plans for some public employees in Missouri, Ohio, and Virginia.

Is Pension Coverage a Problem in the Private Sector?

Source: Alicia H. Munnell and Dina Bleckman, Center for Retirement Research at Boston College (CRR), Issue Brief, IB#14-7, April 2014

The brief’s key findings are:
– Commentators question whether pension coverage is a serious problem, indicating that 80 percent have access to a plan.
– But this number refers to access – not participation – and to full-time workers in both the public and private sectors.
– A review of four household surveys and one employer survey finds that only about half of all private workers (age 25-64) are participating in a plan.
– So, yes, coverage remains a serious problem.

Symposium on State and Local Government Pensions

Source: Public Budgeting & Finance, Volume 33, Issue 3, Fall 2013
(subscription required)

Articles include:
Introduction: Symposium on State and Local Government Pensions
by Philip Joyce

In this issue, Public Budgeting & Finance presents new research on a topic of vital importance to the future of state and local finance. States and localities face substantial challenges in making good on promises to retirees—promises that cover both traditional defined benefit pensions as well as health care coverage. While imbalances in pension funding are a relatively old story, it is only since the Governmental Accounting Standards Board’s (GASB) requirement that states and localities disclose their Other Post-Employment Benefits (OPEB) liabilities that the funding gaps for health care benefits have become obvious.

Pension Reform in Atlanta: Funding Past Promises in an Uncertain Future
by Sarah Beth Gehl, Katherine G. Willoughby And Michael J. Bell

his research assesses state and local pensions in the U.S. Concerns of locally administered pensions are addressed; actions taken and possible reforms to these plans are noted. Then, recent pension reform in Atlanta, Georgia is examined. In 2009, Atlanta had the 12th lowest funding ratio for its general employee fund compared to all other city plans in Georgia. Atlanta’s story explains the depths of its pension problems, how the pension got into trouble and the changes necessary to advance fiscal sustainability. Such plans will require strict discipline by politicians, pension boards and financial managers, and tempering member expectations to reach sustainability.

Impact of Unfunded Pension Obligations on Credit Quality of State Governments
by Christine R. Martell, Sharon N. Kioko And Tima Moldogaziev

This study reviews the funding status of state-administered pension plans and their impact on state credit quality. As the fund ratio (actuarial assets/actuarial accrued liability) of state-administered pension plans decreases, states are more likely assigned a lower rating. Moreover, rating outlooks are sensitive to the fund ratio, especially for migration between stable and negative outlooks for states with lower fund ratios. These results are a timely pretest to the 2013/2014 implementation of GASB Statements No. 67 and 68, serving as a benchmark to assess whether new reporting requirements will yield information to alter the market’s response to unfunded pension liabilities.

The Impact of Budget Stabilization Funds on State Pension Contributions
by Travis St.Clair

Despite the shortfalls in public employee pension funds, there is little known about the effect of fiscal institutions on pension funding. This paper focuses attention on the link between pension contributions and budget stabilization funds (BSFs) over the period 1997–2008. It employs the Blundell–Bond (1998) estimator in order to address the concern that the deposit and withdrawal rules that drive the management of BSFs may be endogenous to state pension contributions. Empirical results suggest that BSFs with strict deposit rules are associated with higher pension contributions, while strict withdrawal rules are associated with lower contributions.

The Management of Defined Contribution Pension Plans in Local Government
by Gang Chen, Carol Ebdon, Kenneth A. Kriz And Olivier Maisondieu Laforge

Despite the growing importance of defined contribution pension plans in state and local governments, little research exists on how those plans are actually managed. Our study fills a gap in the literature through using a mixed-methods approach on a sample of local governments in Nebraska. We employ a mail-out survey to get broad-based information on DC plan administration throughout the state, and use face-to-face interview techniques on a subsample of plans to investigate the details of plan management. We find several deviations from promulgated best practices, and substantial variation in administrators’ knowledge of and role perception related to DC plans.

The Opportunity Cost of Public Funds: Concepts and Issues
by Jérôme Massiani And Gabriele Picco

This paper reviews the main conceptual issues regarding the notion of Opportunity Cost of Public Funds (OCPF) and its use in normative economics. Despite the importance of the mechanisms it illustrates, the OCPF still has received too marginal attention in public economics literature and is often handled with some definitional ambiguity. Our review indicates that the core of the notion lies in the deadweight loss and, to a minor extent, in administrative costs, while other aspects like crowding out are more controversial. Moreover, we argue that the financing mechanisms of the public expenditures should be considered for a proper analysis and quantification of OCPF and suggest that public expenditures are generally financed through the displacement of funds from alternative uses. We conclude with a review of available quantifications.

Assessing the Relationship Between Objective and Subjective Measures of Fiscal Condition Using Government-Wide Statements
by Craig S. Maher And Steven C. Deller

Government Accounting Standards Board (GASB) Statement 34 has been in effect for a decade yet there is limited research examining government-wide financial reporting data. This study builds on our ability to delve into the fiscal condition of Wisconsin counties during the Great Recession. The principal aims of the research are: (1) expand on works utilizing GASB 34 reporting requirements; (2) report on county administrators perceptions of fiscal condition; and (3) examine the relationship between subjective and objective measures of fiscal condition. We find little evidence that objective fiscal condition indices are related to subjective administrative assessments of fiscal condition.