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.

Among the findings:

• Boosted by surging pay and rich formulas, executive pension obligations exceed $1 Billion at some companies.
• Benefits for executives now account for a significant share of pension obligations in the U.S., an average of 8% at General Electric Co., AT&T Inc., Exxon Mobil Corp., International Business Machines Corp., Bank of America Corp. and Pfizer Inc. Sometimes a company's obligation for a single executive's pension approaches $100 Million!
• These liabilities are largely hidden, because corporations do not distinguish them from overall pension obligations in their federal financial filings.
• As a result, the savings that companies make by curtailing pensions for regular retirees -- which have totaled billions of dollars in recent years -- can mask a rising cost of benefits for executives.
• Executive pensions, even when they will not be paid until years from now, drag down earnings today. And they do so in a way that is disproportionate to their size, because they are not funded with dedicated assets.

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.

Someone browsing Time Warner's filings might think its pensions for regular employees were underfunded by 7%. This impression would be illusory. The pension plan for regular Time Warner employees has more assets set aside in it than the plan needs to pay benefits well into the future. The shortfall is due entirely to a plan for highly paid employees, which has a $305 Million unfunded liability. Perhaps the most significant effect of the limited disclosure is to make it difficult, or impossible, to evaluate company statements about their retirement burdens and the need to cut benefits. Pension plans, whether for executives or others, are obligations to pay. In other words, they are debts. And like any debt, they have what amounts to carrying costs. That carrying cost is part of a company’s pension expense. In the case of pensions for regular employees, the expense is partly or wholly offset by investment returns on money the company sets aside in the pension plan when it funded it.
Executive pension plans are different. They are normally left unfunded.

They have no assets set aside in them, which means there is no investment income to blunt the expense. The result is that obligations for executive pensions create far more expense for an employer, dollar-for-dollar, than pensions for regular workers. A company's pension expense is something it has to subtract from its earnings each quarter. The cost of executive pensions, having no investment income to cushion it, hits the bottom line with full force. At the end of last year, General Motors owed nearly 700,000 U.S. workers and retirees pensions totaling $87.8 Billion. But $95.3 Billion had already been set aside to pay those benefits when due. All those assets earning investment returns, which offset the pensions' expense. And although GM lost $10.6 Billion in 2005, its losses would have been far worse without the more than $10 Billion per year in investment income that the GM pension plan for the rank and file generates. The pension plan for GM executives is another matter. Unfunded to the tune of $1.4 Billion, it detracts from GM's bottom line each year. GM's freeze announced earlier this year will cut the cost of GM's pension liabilities by $60 Million. That same freeze will cut salary workers' pensions by $1.6 Billion. How do you feel now?

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:

• 8% for overpayments (7% in the case of a corporation)
• 8% for underpayments
• 10% for large corporate underpayments
• 5.5% for the portion of a corporate overpayment exceeding $10,000.

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:

• 39% have gone to their parents
• 13% have turned to a sibling
• 5% have borrowed from their children
• 11% have approached another family member

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:

• In determining the age at which a worker should apply for Social
  Security benefits, consideration should be given to current and expected future sources of income, age of beneficiary and spouse, health issues that could affect longevity and whether the beneficiary will continue to work while receiving benefits.
• There is no "one-size-fits-all" answer for deciding when Social
  Security benefits should be started. Many workers will benefit by beginning to receive benefits at age 62 due to their circumstances and needs. For others, waiting until full retirement age, or even later, will provide higher annual income in the years ahead when their expenses might outpace their resources.
• How long does it take to break even in the game of taking benefits
  early versus normal retirement age? If two retirees are now 65 and one started collecting Social Security benefits at age 62 and the other starts now, they will collect the same total amount of money when they are 77 years old.
• It is important to do preretirement calculations at least every three
  years, to take into account any changing circumstances or changes in the rules as they apply to Social Security benefits, pensions and investment savings.

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