1.
DESIGNING PUBLIC-SECTOR PENSIONS FOR THE 21ST CENTURY:
TIAA-CREF
manages over $400 Billion of retirement issues on behalf
of 3.2 million participants in more than 15,000
non-profit institutions nationwide. The mission of the
TIAA-CREF Institute, part of TIAA-CREF, is to foster
and conduct objective research, to build knowledge, to
support
thought leadership and to enhance understanding of strategic
issues related to higher education and lifelong financial
security. The Institute has released its publication
on Designing Public-Sector Pensions for the 21st Century,
a risk-managed approach. Public policy makers are often
bombarded with emotion-laden arguments as to the relative
merits of defined benefit and defined contribution plan
designs. Here are definitions of those terms:
- Defined benefit plans define clearly how much monthly
benefit a participant will receive from his employer
when he retires. The benefit may even be stated as an
exact
dollar amount. In the private sector, a participant
is generally not required to make contributions to a
DB plan,
but most public sector funds require employee contributions.
Defined benefit plans do not require the participant
to make investment decisions. Typically, the risks of
meeting
the promised benefits falls to the plan sponsor, who
is responsible for adequately funding the program and
managing
money invested to support the plan.
- Defined contribution plans, on the other hand, define
clearly how much the sponsor and the participant can
or must contribute to an individual account created for
each
participant. When the employee retires, retirement
benefits are based on the total amount contributed plus
investment
gains, minus expenses and losses. Typically, the employee
makes choices about how the money should be invested
and takes the risk of poor investment performance if
his or
her choices do not perform well.
There are anti-defined benefit and anti-defined contribution
rhetoric, which add a great deal of heat but little light
to the subject:
- Defined benefit plans are the "dinosaurs" of
retirement plans on the verge of extinction.
- Public
sector DB plans are "excessive" or "extravagant."
- If private sector employees
do not have DB plans why should public employees?
- Public
sector DB plans are inherently subject to
abuse by politicians and trustees.
- DB plans are
less moral than DC plans because they do not encourage
personal wealth building.
* * *
- Risky defined contribution plans will increase poverty
rates during retirement.
- DC plans will make destitute
the surviving children and spouses of police and firefighters
who gave their
lives
on the job.
- DC plans will line the pockets of greedy investment
providers.
- State and local economies will suffer
if DC plans replace DB plans.
- DC plans will undermine
the actuarial funding of existing DB plans.
The executive summary indicates that the history of public
employee defined benefit pension systems in this country
can and should be viewed as a tale of long-term success.
Since their beginnings in the early part of last century,
these plans have served plan sponsors, participants, beneficiaries
and taxpayers very well as effective vehicles for delivering
cost-efficient, adequate and secure retirement benefits
for employees of state and local governments. Through their
long history and with only a few exceptions, state and
local government defined benefit pension plans have met
the benefits and financial objectives for which they were
originally established. The retirement income security
provided for many covered employees could not have been
achieved without the successful establishment and operation
of the public employee defined benefit retirement systems
that serve nine out of ten state and local government full-time
employees. Most public employee defined benefit retirement
systems remain well funded and financially sound. But an
increasing number are not. Many of the state and local
governments that sponsor plans, even those that are well
funded, are watching their budges become strained to the
breaking point, partially because of the increasing cost
of supporting growing numbers of workers in retirement.
Now, at a time of uncertain future economic growth, record
federal deficits and burgeoning costs of entitlement programs,
some public sector executives and legislators are asking
if public sector defined benefit plans can be sustained
going forward. Although many private sector companies are
making hard decisions to cut back on pension and retiree
health promises just to survive, the concerns and purposes
of governments are not the same as the private sector.
It would be a mistake for public policy makers to assume
that the trend in the private sector to move swiftly to
offload defined benefit pension risk to workers is the
right decision for the public sector. It would also be
a mistake for public sector policy makers not to reassess
just how much pension funding risk they can realistically
accept going forward. Taxpayers will hold their feet to
the fire, at least to consider plan designs that share
the risk for the future. The scholarly paper seeks to show
how new risk-managed retirement designs can protect public
sector workers at the same time as they help proportion
risk more evenly between sponsors and participants to avoid
the fiscal disconnects that, in some cases, threaten fiscal
stability for a growing number of government bodies. The
entire 63-page piece is available at www.tiaa-crefinstitute.org/research/articles.
2. SIXTY-NINE PERCENT OF EMPLOYED U.S. ADULTS RECEIVE
SOME EMPLOYER-PROVIDED RETIREMENT BENEFIT:
PR Newswire
US reports on a new poll that found 69% of employed U.S.
adults receive some type of retirement or other savings
benefit from their employer, and that just under half of
employed adults can participate in a 401(k) plan. Thirty-six
percent say their employer matches their 401(k) contributions,
and 29% have a pension plan. Thirteen percent have the
opportunity to buy company stock, while 9% can participate
in their company’s stock-option plan. Those with
more education are in jobs that offer a greater variety
of financial planning and retirement-preparation opportunities
and incentives. For example, 33% of employed respondents
who were college graduates say their employer provides
a generous company match or 401(k) plan contributions,
compared with 16% of those with high-school education or
less. Further, one-quarter of college grads say that their
employer invites professionals to provide financial or
retirement-planning workshops. Only 8% of those with a
high-school education or less have the same opportunity.
3. THE RETURN TO FULL FUNDING...ALMOST:
For the first
year in this millenium, pension funded status during 2006
was a win-win situation, according to Milliman’s
2007 Pension Funding Study. Strong funded status improvement
fueled by further strong investment returns beating expectations
(12.8% vs. 8.4%) boosted pension fund assets at the same
time that increases in interest rates decreased the value
of pension obligations. Although new accounting rules forced
most companies to reduce shareholder equity to recognize
defined benefit pensions and other post-retirement benefits,
that reduction was about half of the impact that had been
projected last year, due to the win-win year for the funded
status of the plans. Milliman’s 7th annual study
of the financial reports of 100 large U.S. corporations
that sponsor defined benefit plans shows that these companies
had pension plan assets of almost $1.3 Trillion and annual
pension costs of $26.4 Billion. The funded status of the
pension plans improved significantly during 2006, almost
reaching 100%, as liability increases were moderated or
reversed by increases in discount rates, while strong asset
returns boosted assets.
4. I’M FROM IRS AND I’M HERE TO HELP YOU...RIGHT!:
How
many times have you heard that? Well, there is an office
in the Internal Revenue Service where people want to hear
your complaints and will stand up for you, according to
Entrepreneur. Taxpayer Advocate Service is an independent
office within IRS. Many cases the service takes involve
IRS actions that cause undue hardships on a taxpayer. The
office gets results. In the fiscal year ended September
30, 2006, it handled more than 242,000 cases, and was able
to resolve 70% of those in favor of the taxpayers. If you
think you’re not getting a fair shake, call one of
the 75 Taxpayer Advocate branch offices. Start by calling
877.777.4778, or by filling out and faxing IRS Form 911.
(911? How appropriate.) 5. QUOTE OF THE WEEK:
“The race may not be to the
swift nor the victory to the strong, but that’s how
you bet.” Damon Runyon
|
