1.
WHY HAVE SOME STATES INTRODUCED DEFINED CONTRIBUTION PLANS?:
That
is the question posed in a recent Issue Brief, co-published
by Center for Retirement Research of Boston College and
Center for State & Local Government Excellence. Although
defined benefit plans dominate the state and local sector,
in the last decade twelve states have introduced some form
of defined contribution plan. The degree of compulsion
varies among these states from mandatory participation
in a defined contribution plan for new employees, to mandatory
participation in both a defined benefit and defined contribution
plan, to having the defined contribution plan only as an
option. The brief describes the flurry of defined contribution
activity, presents data on participation and assets to
put the flurry into perspective and identifies the factors
that led to the changes occurring in the states where they
did. The most important explanation turns out to be political
rather than economic. States where the same political party
controlled the legislature and the governorship and that
party was Republican were the most likely to introduce
a defined contribution plan. The results also suggest that
plans with a high percentage of union members and those
with sizeable employee contributions are less likely to
add a defined contribution plan component. Interestingly,
states without Social Security coverage, which provides
a basic level of defined benefit protection, are not deterred
from shifting to a mandatory defined contribution plan.
For any given level of benefits, defined contribution plans
cost more than defined benefit plans for state retirement
systems. Even so, sometimes debates about introducing a
defined contribution plan suggest the state can save money.
Other arguments for defined contribution plans have rested
more on the ability of people to control their investments
and take their accumulations with them when they move from
job to job -- aspects that might appeal to younger workers.
Of course, moving away from defined benefit plans means
that individuals must face the risk of poor investment
returns, the risk that they might outlive their assets
and the risk that inflation will erode the value of their
income in retirement. Our view: no retiree should have
to run those risks, particularly when world markets are
in chaos and there is nothing an individual investor can
do about it.
2.
GROWING FISCAL CHALLENGES FOR STATE AND LOCAL GOVERNMENTS
WILL EMERGE DURING THE
NEXT TEN YEARS :
The United States
Government Accountability Office has issued a report to
Congressional Committees dealing with the growing fiscal
challenges that state and local governments will face during
the next decade. By way of background, the state and local
government sector consists of fifty state governments and
87,525 local governments. These local governments include
3,034 county governments, 19,429 municipal governments,
16,504 townships, 13,506 school districts and 35,052 special
districts. State and local governments provide vital services
to citizens, such as law enforcement, public education
and sewage treatment. Local governments derive their authority
from the states, and the powers and responsibilities granted
to local governments vary considerably. For example, while
states generally provide authority to local governments
to tax real property, local governments vary in their authority
to levy other types of taxes, such as personal income or
sales taxes. State and local governments collect receipts
and receive federal funds to provide services to their
constituents. In 2006, state and local governments received
$1.9 Trillion in total receipts. Taxes, such as property
taxes, sales/excise taxes, personal income tax and corporate
income taxes make up a large component of these receipts
-- fully $1.2 Trillion. In addition, the federal government
provided over $400 Billion to state and local governments
in the form of various grants (including Medicaid), loans
and loan guarantees. These federal funds accounted for
approximately 22% of state and local government total receipts.
The model in GAO’s report shows that in less than
a decade the state and local government sector will begin
to face growing fiscal challenges. Both fiscal balance
measures (net lending or borrowing and the operating balance)
are likely to remain within the historical range in the
next few years, but both begin to decline thereafter and
fall below historical ranges within a decade. In other
words, absent policy changes, state and local governments
will face an increasing gap between receipts and expenditures
in the coming years. Since a majority of state and local
governments actually face requirements that their operating
budgets be balanced or nearly balanced in most years, the
declining fiscal conditions GAO’s simulations suggest
are really just a foreshadowing of the extent to which
these governments will need to make substantial policy
changes to avoid these potential growing fiscal imbalances.
Since 1992, GAO has produced long-term simulations of what
might happen to federal deficits and debt under various
policy scenarios. GAO’s most recent long-term federal
simulations show even larger deficits resulting in a very
large and growing federal debt burden over time. In that
work, GAO found that federal fiscal difficulties stem primarily
from an expected explosion of health-related expenditures.
The findings thus show that the state and local sector
will provide an additional drag on an already-declining
federal government fiscal outlook, and that the critical
problem of escalating costs of health care is an economywide
problem that will need to be addressed by all levels of
government. GAO-08-317 (January 2008)
3. ABSTRACT OF 2005 FORM 5500 ANNUAL
REPORTS:
The U.S. Department of Labor Employee
Benefits Security Administration
has published its Private Pension Plan Bulletin, which
is an abstract of 2005 Form 5500 Annual Reports filed
by private pension plans. Over the past thirty years, as
the
private pension system has shifted from defined benefit
plans to 401(k)-type defined contribution plans, the
financing of benefits has shifted from employer to participants.
In 1978, when legislation was enacted authorizing 401(k)-type
plans that allow employees to contribute on a pre-tax
basis,
29% of contributions to DC plans, and only 11% of total
contributions to all DB and DC pension plans were contributed
by participants. The percent of contributions made by
employees to DC plans has doubled since then, but has remained
steady
at 60% for the last seven years. Here are some other
highlights:
- The total number of pension plans fell for the fifth
year in a row, by .6% in 2005, to 679,000 plans. DB
plans increased by .2%, while DC plans fell by .6%.
- In 2005, the total active participant count increased
to 82.7 million. However, most of the increase between
2004 and 2005 is due to a change in definition of active
and total participants used for the 2005 report. The
number of active participants in DB plans decreased to
20.3 million
while the number of active participants in DC plans
increased to 62.4 million.
- Pension plan assets increased for a third year in
2005. Total pension plan assets reached $5.1 Trillion,
exceeding
the previous high of $4.7 Trillion in 2004. DB plan
assets grew by 7% to $2.3 Trillion and DC plan assets
increased
by 8.5% to $2.8 Trillion.
- DC plan contributions grew by 8.8%, to $248.8 Billion.
DB plan contributions decreased by 1.9% to $92.7 Billion,
a smaller decline than was observed in 2004. Overall,
contributions to pension plans increased by 5.7% in 2005
to $341.5 Billion.
- In 2005, pension plans disbursed $354.5 Billion for
payment of benefits, with $136.6 Billion being disbursed
in DB plans and $218 Billion from DC plans. These payments
were made either directly to retirees, beneficiaries
and terminating employees or to insurance carriers for
payment
of benefits. These amounts reflect a decrease from
2004 of 2.8% in defined benefit plans and an increase
of 13%
in defined contribution plans.
- Overall, pensions disbursed $13.1 Billion, or 3.8%,
more than they received in contributions. DB plans
disbursed $43.9 Billion more than they collected in contributions,
while DC plans disbursed $30.8 Billion less than they
received
in contributions.
The bulletin supplies lots of good information, even if
a bit tedious.
4.
WINE WHINE:
Proceedings of the National Academy of
Sciences of the United States
of America (who?) has found
in a study that marketing conditions can modulate neural
representations of experienced pleasantness (what?). Despite
the importance and pervasiveness of marketing, almost nothing
is known about the neural mechanisms through which it affects
decisions made by individuals. PNAS (yes, that’s
the acronym) proposes that marketing actions, such as changes
in price of a product, can affect neural representations
of experienced pleasantness. PNAS tested the hypothesis
by scanning human subjects using functional MRI while they
tasted wines that, contrary to reality, they believed to
be different and sold at different prices. Results show
that increasing price of a wine increases objective reports
of flavor pleasantness, as well as blood-oxygen-level-dependent
activity in medial orbitofrontal cortex, an area that is
widely thought to encode for experienced pleasantness during
experimental tasks. The paper from PNAS provides evidence
for the ability of marketing actions to modulate neural
correlates of experienced pleasantness and for mechanisms
through which the effect operates. So, what the heck does
all of this mumbo jumbo mean? Well, it means that there
are wine snobs. Now, here’s what to do: buy one very
expensive bottle of wine; carefully remove the price sticker,
and secure it to another bottle of Two-Buck Chuck; make
sure the price remains visible at all times; chuckle while
your fancy friends swoon over your fabulous vino.
5. DAFFY-NITIONS:
Conference: The confusion
of one man multiplied by the number present. 6.
QUOTE OF THE WEEK:
“The man who says he is willing
to meet you half way is usually a poor judge of distance.” Lawrence
Peter
|
