Cypen & Cypen
JUNE 29, 2006
Stephen H. Cypen, Esq., Editor
1. WANT TO DO A SLOW BURN? AS WORKERS' PENSIONS WITHER, THOSE FOR EXECUTIVES FLOURISH:
Kudos to the Wall Street Journal for a Page 1 story on a heretofore hidden burden -- how companies run up big IOUs, mostly obscure, to grant bosses a lucrative benefit. To help explain its deep slump, General Motors Corp. often cites "legacy costs," including pensions for its giant U.S. work force. In its latest annual report, GM wrote: "Our extensive pension and post-employment obligations to retirees are a competitive disadvantage for us." Early this year, GM announced it was ending pensions for 42,000 workers. But there is a twist to the auto maker's pension situation: the pension plans for its rank-and-file U.S. workers are overstuffed with cash, containing about $9 Billion more than is needed to meet their obligations for years to come. Another of GM's pension programs, however, saddles the company with a liability of $1.4 Billion. These pensions are for its executives. As many companies reduce, freeze or eliminate pensions for workers -- complaining about the costs -- their executives are building up ever-bigger pensions, causing the companies' financial obligations for them to balloon. Companies disclose little about any of this situation. But a Wall Street Journal analysis of corporate filings reveals that executive benefits are playing a large and hidden role in the declining health of America’s pensions.
Companies often design retirement payouts to replace a percentage of what a person earns while active. But for executives, the percentage of pay replaced is itself higher. Compensation committees often aim for a pension that replaces 60% to 100% of a top executive's compensation. It’s 20% to 35% for lower-level employees. At Pfizer, the Chairman and CEO's $6.5 Million-a-year pension will replace 100% of his current salary and bonus -- an $83 Million liability for Pfizer today. At UnitedHealth Group Inc. top executive's pension liability is about $90 Million. Executive pensions make up a significant portion of total pension liabilities at many companies: 12% at Exxon Mobil and Pfizer; 9% at Met Life Inc. and Bank of America; 19% at Federated Department Stores Inc.; and 58% at Aflac Inc. And here's a good one: at Nordstrom Inc., the nearly 30,000 ordinary employees do not get pensions. But the 45 executives do. Even if a company's liability for executives' pensions totals hundreds of millions of dollars, its employees and shareholders may never know. Companies do not have to report this obligation separately in federal financial filings. A few specify it in a footnote, and some provide clues that make it possible to derive the figure. Lumping pensions together can also give a false impression of security of the ordinary workers' plan.
2. NATIONAL RETIREMENT RISK INDEX:
According to the Center for Retirement Research at Boston College, the National Retirement Risk Index measures the percentage of working-age households who are at risk of being unable to maintain their pre-retirement standard of living in retirement. It addresses one of the most compelling challenges facing the nation today -- insuring retirement security for an aging population. While many current retirees are doing quite well, the outlook for Baby Boomers and Generation Xers is far less sanguine. The National Retirement Index analysis shows that even among the Early Boomers, 35% of households are at risk of being unable to maintain their standard of living in retirement. The Early Boomers are the age group best prepared for retirement, because many have acquired benefits under traditional defined benefit plans and they are not fully exposed to the increase in Social Security's normal retirement age. As Social Security's normal retirement age moves to 67, defined benefit plans fade in an environment where total pension coverage remains stagnant, and life expectancy increases, the share of households at risk rises to 44% for the Late Boomers and 49% for members of Generation X. The situation is not hopeless, however. Sensitivity analyses of the Index results show that change in retirement and savings behavior can substantially improve the outlook. Individuals, employers and policymakers all have a role in bringing about these changes to ensure sufficient retirement income for an aging society.
3. IRS RAISES INTEREST RATES:
The Internal Revenue Service announced there will be an increase in the interest rates for the calendar quarter beginning July 1, 2006. Each of these interest rates increases by a single interest point over the rate in the second quarter. The interest rates are as follows:
Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. IR-2006-089 (June 5, 2006).
4. AMERICANS’ SAVINGS COME UP SHORT:
A recent USAA survey of almost 3,000 adults suggests that consumers need to look more closely at how they invest their money, plan for financial ups/downs and pay for day-to-day purchases. The survey found that 25% of U.S. adults who have an investment account have made an investment decision based solely on a friend or family member’s recommendation, while 23% say they have gone with their gut instinct. The survey also found that men (27%) are more likely than women (17%) to follow their gut instincts when investing. Americans look in various places when they need to make up for financial shortfalls, with more than half borrowing money from family members:
The survey also found that the high volume consumer credit card use is hurting retirement saving. According to the survey, 43% of U.S. adults say they have used their credit cards to pay for purchases of less than $5 and 33% of those individuals doing so at least once a week. The trend is most prevalent among younger adults, with 55% of 18- to 34-year-olds saying they have used a credit card for purchases of less than $5. The survey was reported in PlanSponsor.com.
5. FOR SOCIAL SECURITY, WHAT IS THE MAGIC AGE?:
What is the best age to begin collecting Social Security benefits? Is it 62? 65? 67? Kathryn Garnett is a nationally recognized speaker and educator who specializes in helping Americans of all ages understand the complexities of Social Security. Her guide, published in the Journal of Accountancy, is designed to help people maximize their financial security through their 60s and beyond. In order for workers to receive Social Security benefits, they must meet certain criteria. The basic requirement for eligibility is accumulation of 40 work credits during one’s working life. A worker earns one working credit for predetermined dollar earnings ($970 in 2006), to a maximum of four work credits in any calendar year. Full-time workers earn this easily in the early part of the year; even part-time workers can earn requisite work credits within ten years. The second computation is the average of the worker’s highest 35 years of earnings. These years need not be consecutive, but any “0" years lower the average. The good news is that earnings are adjusted for inflation. An inflation factor is applied to all earnings before age 60, making them approximate current dollars. The amount of the benefit a worker receives is a percentage of that calculated amount. Because the intent of Social Security is to provide a safety net for low-income workers, the system is designed to provide higher benefits to this group. Where a high-income worker might receive replacement of about 25% of income, workers who earned minimum wages throughout their working lives might receive as much as 62% pay replacement. The following comes from the executive summary:
Incidentally, the piece contains an interesting chart, showing gradual change in the normal retirement age of 65 for those born in 1937 or earlier (with an 80% payment at age 62) to age 67 for those born in 1960 and later (with a 70% payment at age 62).
6. JANE BRYANT QUINN'S REQUIEM FOR PENSIONS:
Writing in the current Newsweek, finance columnist Jane Bryant Quinn says "I want to speak up for the value of corporate pension plans, which are slowing slipping away. The country hardly seems to care." And that is the problem. Younger workers would rather invest in 401(k)s (pensions carry a musty smell). At retirement, older workers often reject their plan's offer of a monthly income for life in favor of taking a lump sum to invest themselves. Hundreds of companies have closed or limited their plans in recent years, switching to 401(k)s instead. Most tech firms, among others, never offered them in the first place. That is too bad, because guaranteed lifetime incomes should not thrown away lightly. They can offer better returns than one will ever get from one’s investments, and more personal security, too. One study found that the value of pensions grew substantially in the past five years. In a typical plan, the retirement benefit for someone 65 today might have grown 97% since 2000, and 244% for a 40-year-old (not counting both market changes and additions due to aging). And that is a frozen plan. A "live" one would have gained much more. Pension plans also earn more on their investments than a typical 401(k) due to better management and lower expenses. The country is moving from an efficient retirement system to a less efficient one. But that is only if you are a working stiff. Top executives are not only keeping their pensions, their payoffs are leaping even as yours are being pared. Tough luck. Today, the money flows to the "deserving rich." (See Item 1 above).
7. SCARY FACTOID:
"Personal saving as a percentage of disposable personal income was -0.5% in February, the same as in January. Negative personal saving reflects personal outlays that exceed disposable personal income." -- U.S. Commerce Department. Apparently, the nation's savings problem is even worse than we think. Not only are we not saving enough, but we are spending more than we make. In fact, media coverage of the foregoing report noted that, in the course of 2005, Americans spent more than they earned for the first time since the Great Depression. This lovely news comes from Nevin Adams, Editor-in-Chief of PlanSponsor, writing in On Wall Street.
8. COLORADO GOVERNOR SIGNS BILL TO COVER HUGE PENSION PLAN SHORTAGE:
From TheDenverChannel.com, we learn that a newly-signed bill in Colorado will protect 68,000 retirees and 175,000 active workers in state and local governments who are enrolled in the state’s pension plan. It covers a projected $11 Billion shortfall in the Public Employees Retirement Association. New employees in higher education will be able to choose either a new defined contribution plan or the traditional defined benefit plan. Public employees also agreed to give up a portion of their raises over the next six years to help keep the plan solvent.
9. QUOTE OF THE WEEK:
Now this quote is always true. "The longer one saves something before throwing it away, the sooner it will be needed after it is thrown away." James Caufield
Copyright, 1996-2006, all rights reserved.
Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.