1.
REP. MEEK INTRODUCES LEGISLATION TO ADDRESS PUBLIC SAFETY
RETIREE TAX ISSUE:
National Conference on Public Employee
Retirement Systems announces that Representative Kendrick
Meek (D-FL) recently introduced legislation in the House
of Representatives to fix issues related to public safety
retiree taxation that came about as a result of recent
changes to the tax code. Section 828 of the Pension Protection
Act of 2006 amended the tax code to allow retired public
safety employees beginning at age 50 to take distributions
from their defined benefit pension plans without paying
the 10 percent early distribution tax. Section 828 was
enacted recognizing that, due to nature of the profession
and in many cases mandatory retirement ages, public safety
employees typically retire earlier than the general population.
Of course, 26 U.S.C. 72(t)(2)(A)(v) permits all other retirees
to take distributions without the 10 percent tax, beginning
at age 55. Unfortunately, since implementation of PPA Section
828, two issues have arisen that need to be fixed. First,
public safety employees between ages 50 and 55 who chose
to roll over their distributions into a 457 plan and then
take distributions from the 457 plan are now subjected
to the 10 percent early distribution tax until age 59½.
The second issue revolves around public safety employees
who retired before age 55 and before enactment of Section
828 and who opted to annuitize their benefit to avoid the
10 percent early distribution tax. After enactment of Section
828, if those retirees decide to take a modified distribution
from their plans, they are subjected to a 10 percent recapture
tax on the previous annuitized distributions. NCPERS has
been working with members of Congress and other interested
partners to craft a legislative fix, and on May 22, 2008,
Representative Meek introduced H.R. 6157, a bill that will
do what is necessary. The bill has been referred to the
House Ways and Means Committee. NCPERS is committed to
continuing to seek Congressional support for the bill and
ensuring that it becomes law. Readers can help by calling
or writing their member of Congress in Washington, and
asking that he or she sign-on as a co-sponsor to H.R. 6157.
The Capitol switchboard can be reached at 202.224.3121.
As always, NCPERS is to be congratulated for its fine work
in the area of public employee retirement issues.
2. SUPREME COURT CURTAILS RIGHTS OF PUBLIC
EMPLOYEES:
In ultimately rejecting an Oregon woman’s
discrimination lawsuit, the United States Supreme Court
said the case
threatened to turn millions of ordinary job grievances
into federal cases. Engquist, an Oregon public employee,
filed suit against her agency, her supervisor and a co-worker,
asserting, among other things, claims under the Equal Protection
Clause. She alleged she had been discriminated against
based on her race, sex and national origin, and she also
brought a so-called “class-of-one” claim, alleging
that she was fired not because she was a member of an identified
class (unlike her race, sex and national origin claims),
but simply for arbitrary, vindictive and malicious reasons.
A jury rejected the class-membership equal protection claims,
but found for Engquist on her class-of-one claim. The United
States Court of Appeals for the Ninth Circuit reversed
in relevant part. Although recognizing that the Supreme
Court had upheld a class-of-one equal protection challenge
to state legislative regulatory action, the Court of Appeals
emphasized that the U.S. Supreme Court had routinely afforded
government greater leeway when it acts as employer rather
than regulator. However, the U.S. Supreme Court concluded
that extending the class-of-one theory to the public-employment
context would lead to undue judicial interference in state
employment practices and invalidate public at-will employment.
Thus, the high court held that the class-of-one theory
of equal protection does not apply in the public employment
context. Engquist v. Oregon Department of Agriculture,
Case No. 07-474 (U.S. June 9, 2008).
3. PENSION PLANS SAY “THANK YOU
SUBPRIME” FOR
RETURN TO OVERFUNDING:
Bloomberg.com reports that the subprime-mortgage
crisis that crushed home sales and financial stocks during
the last year was a boon to at least one group of investors:
pension plans at some of the largest U.S. companies. The
global credit shortage and its effect on interest rates
helped companies in the Standard & Poor’s 500
Index cut estimates of pension obligations, as their returns
from U.S. government bonds increased. The combined pensions
of S&P 500 companies swung to a $63 Billion surplus
in 2007 after five years in the red. The number of overfunded
plans rose to 127 last year from 85 in 2006. The health
of U.S. pension funds is crucial to investors as well as
retirees because changes in funding can ripple through
financial statements, affecting profits, cash outlays,
credit ratings and bank loans. As home-loan delinquencies
climbed in the last twelve months, banks scaled back lending
and investors fled corporate debt for the safety of Treasuries.
The market adjustment caused Treasury yields to fall and
corporate yields to rise, driving up the so-called discount
rate used by most pension plans by an average of 50 basis
points.
4. UNUSUAL STRATEGIES FOR CLAIMING SOCIAL
SECURITY BENEFITS:
Social Security offers three distinct
types of benefits for retired workers and their spouses:
(1) the basic retirement
worker benefit, which is determined by how long an individual
works and how much he earns; (2) a spousal benefit, which
provides a worker’s spouse with a benefit once the
worker has claimed his own benefits; and (3) a survivor
benefit, which provides a surviving spouse with a benefit
after a worker’s death. The full retired worker benefit
(Primary Insurance Amount or PIA) is available at a worker’s
Full Retirement Age (FRA), which is currently 66, but will
eventually rise to 67. Individuals are allowed to claim
a smaller benefit as early as age 62 or a larger benefit
by claiming after FRA up to age 70. A piece from Center
for Retirement Research at Boston College describes three
unusual, but allowable, strategies for claiming Social
Security benefits. These strategies may allow some households
to receive increased lifetime benefits, depending on their
specific work histories, personal preferences, demographic
characteristics and mortality. On the other hand, these
strategies could result in lower lifetime benefits depending
on how long the claimant lives. So, here we go:
Strategy 1 - Borrow and Invest. An individual
can claim Social Security benefits at, say, 62 and then
reclaim at,
say, 66 at a higher benefit level as long as he pays
back the money that he has received, without interest,
during
the interim period. This strategy is the same as receiving
a zero-interest loan from Social Security. The claimant
could invest his Social Security benefits, keeping investment
earnings and then later pay back the principal of the “loan.” The
claimant, with an average life expectancy, comes out
ahead by the amount of the investment earnings. Of course,
should
the claimant die shortly after giving back the benefits,
this strategy would involve a loss.
Strategy 2 - Claim Now, Claim More Later. A married individual
can claim a spousal benefit at Full Retirement Age and
switch to her own retirement worker benefit at a later
date. This approach allows a worker to begin claiming one
type of benefit while still building up delayed retirement
credits, which will result in a higher worker benefit later.
Individuals who have not reached FRA are not allowed to
limit the scope of their benefit application in this way.
Strategy 3 - Claim and Suspend. An individual
may claim his Social Security benefit and then suspend
payment in
order to allow his spouse to claim a spousal benefit
while still allowing the value of his own future benefit
to rise.
This claiming strategy was authorized by the Senior
Citizens’ Freedom
to Work Act of 2000, which allows a worker to earn
delayed retirement credits after filing for benefits
if he requests
that he not receive benefits during a given period.
The intuition is that, by allowing a spouse to claim
right
away while allowing a worker to continue building up
delayed retirement credits, such a provision may help
encourage
older individuals to work longer.
How much more complex can Social Security get?
5. PRINCIPAL FINANCIAL WELL-BEING INDEX?
SUMMARY:
Principal Financial Group has released
its quarterly Well-Being Index?.
Its purpose is to identify and track changes in the workplace
of small and mid-sized (growing) businesses. Employees
surveyed consisted of adults who work at small and mid-sized
U.S. businesses (10-1,000 employees). Retirees consisted
of adults over 60 who reported they are retired, employed
part-time, self-employed and retired from a previous
career. The following are some key findings:
- Six out of ten retirees and nearly as many employees
(58%) think we are currently in a recession.
- When asked how they would reduce spending due to
an economic slowdown, employees and retirees said they
would
eat fewer meals at restaurants, spend less on clothing
and other consumer items and cut back on entertainment.
- For employees, rising fuel costs have affected their
automobile purchasing decisions (35%) and holiday vacation
plans (35%). Retirees’ holiday vacation plans
(33%) and automobile purchasing decisions (20%) have
been influenced.
- Six out of ten employees and nearly half of retirees
(49%) indicate they are going out to eat less to offset
increases in grocery prices. Around half of both retirees
(47%) and employees (55%) are purchasing store or generic
brands.
- Approximately seven out of ten retirees (69%) and
six out of ten employees (58%) have an emergency fund
of money
they can immediately access if necessary. Over half
of retirees (54%) said they could cover over six months
of
living expenses with their emergency fund, compared
to only 29% of employees.
- As to employees, job security was ranked number one
in terms of importance by more employees (47%), over
long-term financial future (41%) and challenging work
(12%). Significantly
more employees ranked job security as number one in
terms of importance than in the second quarter of 2007.
Just
about a quarter (24%) of employees have some level
of concern with their own job security.
When the fit hits the Shan, it’s not going to be
pretty.
6. HUMOR FOR LEXOPHILES:
The professor
discovered that her theory of earthquakes was on shaky
ground. 7. QUOTE OF THE WEEK:
“The trouble with jogging
is that the ice falls out of your glass.” Martin
Mull
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