The Internal Revenue Service (IRS) has ruled that employee contributions to a trust fund established by Bristol, R.I., to fund post employment benefits are tax exempt. The ruling sets a precedent for other cities seeking similar solutions to pay for Other Post Employment Benefits (OPEB).
There is no question that the aging of America will have a profound impact on individuals, families, and U.S. society. The Health and Retirement Study (HRS), sponsored by the National Institute on Aging under a cooperative agreement with the University of Michigan, follows more than 20,000 men and women over 50, offering insight into the changing lives of the older U.S. population. Launched in 1992, this multidisciplinary, longitudinal study has become known as the Nation’s leading resource for data on the combined health and economic conditions of older Americans.
Growing Older in America: The Health & Retirement Study describes the breadth and depth of the HRS to help familiarize a broad range of researchers; policymakers; media; and organizations concerned with health, economics, and aging with this data resource. Published in 2007, this colorful data book describes the HRS’s development and features and offers a snapshot of research findings based on analyses of the Study’s data. Sections of the report look at older adults’ health, work and retirement, income and wealth, and family characteristics and intergenerational transfers. More than 65 figures and tables illustrate the text.
While many factors influence workers’ decisions to retire, Social Security, Medicare, and pension laws also play a role, offering incentives to retire earlier and later. Identifying these incentives and how workers respond can help policy makers address the demographic challenges facing the nation. GAO assessed (1) the incentives federal policies provide about when to retire, (2) recent retirement patterns and whether there is evidence that changes in Social Security requirements have resulted in later retirements, and (3) whether tax-favored private retiree health insurance and pension benefits influence when people retire. GAO analyzed retirement age laws and SSA data and conducted statistical analysis of Health and Retirement Study data.
Source: Jeff Sloan, Genevieve Ng and Merlyn Goeschl, CPER Journal, no. 184, June 2007
The convergence of new reporting standards by the Governmental Accounting Standards Board (GASB), the rising cost of health care, and the huge number of baby boomers nearing retirement age have knocked the public employment sector on its ear. In the past, public employers typically operated on a “pay as you go” model for other post-employment benefits (OPEBs), without reference to any future unfunded liabilities. However, the new GASB rules, which began taking effect in 2005, require public employers to account for and disclose their outstanding future OPEB liabilities, in much the same way they are required to do for pension benefits. Although OPEBs include benefits like post-employment life insurance plans, disability, and long-term care, retiree health care benefits account for the bulk of the unfunded OPEBs facing public employers today.
1. Why was Statement 45 on OPEB accounting by governments necessary?
Statement 45 was issued to provide more complete, reliable, and decision-useful financial reporting regarding the costs and financial obligations that governments incur when they provide postemployment benefits other than pensions (OPEB) as part of the compensation for services rendered by their employees. Postemployment healthcare benefits, the most common form of OPEB, are a very significant financial commitment for many governments. ….
from the press release:
Springfield, IL (Monday, May 7, 2007) – A new study released today at the Statehouse has found that – contrary to widespread perception – switching from Illinois’ current defined benefit system to a defined contribution system will do nothing to solve the state’s $40.7 billion unfunded pension liability and would likely result in much lower retirement benefits for public employees and higher costs for taxpayers.
The study, “The Illinois Public Pension Funding Crisis: Is Moving from the Current Defined Benefit System to a Defined Contribution System an Option that Makes Sense?”, was conducted by the Illinois Retirement Security Initiative, a project of the Center for Tax and Budget Accountability. The study finds that the conventional wisdom that switching to a defined contribution system will solve the state’s massive unfunded public employee pension liability is provably false.
Before January 2006 and the implementation of Medicare Part D, dual-eligible assisted living residents (those who receive Medicaid and Medicare benefits) were exempted from remitting co-payments for their prescription drugs. The exemption from co-payments was also applicable to individuals residing in skilled nursing homes, as well.
Under the new Medicare Part D program, however, dual-eligible residents in assisted living communities are not exempt from prescription drug co-payments. This has created a severe financial hardship for these residents who are already living on very low incomes. The only discretionary income most of these residents have is a Personal Needs Allowance (PNA)—frequently less than $60 per month. Residents use the PNA to pay for clothing, personal hygiene items, over-the-counter medications, and any other necessary items they need. To have to use this meager allowance to cover prescription drug co-pays is a true hardship.
Source: Laurence J. Kotlikoff and David S. Rapson, National Center for Policy Analysis, NCPA Study No. 298, June, 2007
Does it pay to save? The answer is often no. In fact, penalties for saving are astronomical for some households, particularly young, single-parent and lower-income families. But these are the very people who need the strongest incentives to save for retirement.
Determining the effective marginal tax on additional saving is difficult because of the complexity of the tax code and the interaction of different government tax and transfer programs (such as food stamps) that are limited to households below certain income and asset ceilings. Saving and wealth accumulation can put a family over an asset limit and cost thousands of dollars in lost benefits.
To calculate the effective marginal tax on saving, this study uses financial planning software that carefully determines tax and transfer payments at each stage of a person’s life, based in part on economic choices they make in prior periods. The model assumes people try to even out consumption over their lifetimes.
The results: For single parents with two children, effective marginal taxes on savings are regressive – lower-income households pay higher rates than high-income households.
Over the past few years, there has been intense debate about Social Security reform in the United States. A number of options, ranging from changing the benefit formula to adding individual accounts, has been discussed. The policy debate takes place against the backdrop of an aging population, rising longevity, and relatively low fertility rates, which pose long-range financial challenges to the Social Security system. According to the 2007 Social Security Trustees Report’s intermediate assumptions, the Social Security trust funds are projected to experience cash-flow deficits in 2017 and to become exhausted in 2041.
As policymakers consider how to address Social Security’s financing challenges, efforts of Social Security reform across the world have gained attention. One of the most oft-cited international cases of reform is Chile. Chile initiated sweeping retirement reforms in 1981 that replaced a state-run, pay-as-you-go defined benefit retirement system with a private, mandatory system of individual retirement accounts where benefits are dependent on the account balance. As a pioneer of individual retirement accounts, Chile has become a case study of pension reform around the world. Although Chile’s experience is not directly comparable to the situation in the United States because of large differences between the countries, knowledge of the case may be useful for American policymakers.
Source: Steven Brull, Institutional Investor, April 2007
A little learning is a dangerous thing. But not when it comes to running the nation’s second-biggest pension fund. For years the California State Teachers’ Retirement System was the epitome of a creaky, mismanaged bureaucracy, toiling in the shadow of its cross-town sibling, the California Public Employees’ Retirement System. Its membership—public school and community college teachers—felt neglected. Its investment staff was underpaid. Its returns in most years were at best mediocre. That has all changed. CalSTRS has awakened from its slumber, emerging as a powerful force on the local and national stage.