Month: April 2018

Retirement Roundup: What to do about the ‘impending retirement crisis’

Posted on by planeteria

A digest of timely information and insight about finance, investing, and retirement.

Americans haven’t saved enough for retirement. What are we going to do about it? | Harvard Business Review
Ultimately, the shift from defined benefit pension plans to employee-directed defined contribution 401(k)s is the major driver of the impending retirement crisis. Beginning in the 1980s, this move helped companies reduce their retirement liabilities and better meet their quarterly financial targets, but put an unmanageable burden on employees. For 401(k)s to be effective, for example, contributions must be made consistently throughout a worker’s career. In practice, people tend to make contributions sporadically. They also struggle in choosing contribution levels and investment options, and avoiding the temptation of using their savings for other needs.

Ohio lawmakers kill bill to cut PERS benefits |The Columbus Dispatch
Republican House leaders shut down hearings on legislation to reduce benefits for Ohio’s largest public retirement system after running into fierce opposition from retirees. The measure would implement recommendations by the Ohio Public Employees Retirement System – or OPERS – aimed to shore up the $90 billion fund. After a handful of hearings, the bill did not have enough votes to pass. It was opposed by many Republican and Democratic lawmakers, and even the state representative sponsoring the bill was skeptical about the plan.

Why early retirement can be a killer |MarketWatchThink twice – nay, thrice – before claiming your Social Security benefits at age 62. Your life might depend on your decision. Literally. That’s because there’s a marked increase in mortality among men who retire at 62 and begin receiving Social Security, according to a fascinating new study that recently was distributed by the National Bureau of Economic Research. Its authors are two economics professors: Maria Fitzpatrick of Cornell University and Timothy Moore of the University of Melbourne in Australia. The increase in the death rate is quite large, furthermore, particularly among males who retire and claim Social Security at 62: By 20 percent, according to the study. Among females, in contrast, the data are inconclusive.

Many Americans try retirement, then change their minds |The New York Times
Sue Ellen King had circled her retirement date on the calendar: March 8, 2015. She had worked as a critical care nurse and nursing educator at University of Florida Health (UF Health) in Jacksonville, Fla., for 38 years; co-workers joked that she was there when the hospital’s foundation was laid, which happened to be true. So the send-offs went on for days — parties in the units where she had worked, a dinner in her honor, gifts including a framed photo signed by colleagues. Ms. King felt ready. She’d turned 66, her full Social Security retirement age. She’d invested fully in the hospital’s 401(k) plan and consulted with a financial adviser. She and her husband, who had already retired, had paid off the mortgage on their three-bedroom ranch. They took a week’s trip to Hilton Head, S.C., to celebrate their impending freedom. But her retirement lasted just three months. “I’d done all the preparation, except to really think about what life was going to be like,” Ms. King said. Days spent organizing recipes and photos, and lunching with friends, proved less engaging than expected.

Minnesota Senate unanimously approves pension bill |Chief Investment OfficerThe Minnesota State Senate has unanimously approved a pension overhaul bill that proposes mandatory contribution increases, reduced cost-of-living adjustments, and a lower investment rate of return for the state’s public retirement plans. Backers of the reform say the proposed bill would save Minnesota $6.1 billion over a 30-year period, $3.4 billion of which will be in immediate savings. They also say that if enacted, the state’s public pension plans’ funded status will be between 85 percent and 95 percent by 2048 from approximately 77.8 percent in 2017. “This is the largest pension reform bill in Minnesota’s history,” said the bill’s author, Sen. Julie Rosen (R), in a statement, adding that it “took years of work and negotiations.”

Why women should keep working after their husbands retire |The Wall Street JournalAmerican women should keep working after their husbands retire if they want to catch up in terms of Social Security benefits, based on new research. Married couples often choose to stop working at the same time, taking advantage of the opportunity to travel or otherwise spend time together. But most married women are younger than their husbands, and some have delayed or interrupted careers due to child-rearing. Waiting longer to retire would bring them disproportionate gains under the formula for calculating Social Security retirement benefits, economist Nicole Maestas said in a recent paper. “If you have had a period out of the labor force, or a period of part-time work, or a period when you were earning much less than you’re earning now….you have an opportunity to replace those zeros with positive numbers that are high,” said Ms. Maestas, an associate professor of health care policy at Harvard Medical School. “I’m not sure people are fully aware of all of that.”

Setting a goal for PERA reform: Why does the time period to full funding matter?

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As SB 18-200 makes its way through the Legislature, there has been significant discussion over the goal line: the 30-year timeframe in which PERA becomes fully funded. There has been debate over whether achieving full funding in 30 years is the right goal – some say it is too aggressive while others say it is not sufficiently so. Agreement on the goal is a critical part of the conversation, as the destination surely dictates the direction.

There are several reasons why the PERA Board of Trustees and many others are advocating for a 30-year goal, which is also referred to as an amortization period, and why it served as the basis for the Board’s recommendation to the General Assembly.

Full funding in 30 years is compliant with Colorado statute and the PERA Board’s policy. In 2015, the PERA Board of Trustees adopted The Colorado PERA Defined Benefit Plan Funding Policy to inform decisions on whether to seek legislative changes to benefits and contributions. Within the policy, the time frame to reach full funding is set at 30 years. This is reflective of the section of Colorado State statute that states, “A maximum amortization period of thirty years shall be deemed actuarially sound.”

Full funding in 30 years is achievable. Late last year, after many months of gathering input from stakeholders, the PERA Board finalized a legislative recommendation that would fully fund PERA within 30 years and was based on “shared responsibility” between members, retirees, and employers. These deliberations included months of internal debate, consultations with actuaries and other experts, an extensive in-person listening tour with stakeholders throughout Colorado led by PERA staff, and a series of telephone town hall meetings.

The Board’s recommendation includes a unique feature, the automatic adjustment provision that would allow PERA to remain on a path to full funding in 30 years without requiring additional legislation. The automatic adjustment mechanism would trigger modifications to contributions and the annual increase to ensure the 30-year goal is met.

Full funding in 30 years gives PERA resiliency. While 30 years may seem like a long time to pay down the unfunded liability, it is important to note that the plan will continue to get stronger over that period of time. Under the Board’s proposed 30-year plan, PERA’s funded status would improve as the unfunded liability decreases. This improvement would help the fund’s ability to withstand economic fluctuations and market corrections.

While it might seem enticing to extend the funding deadline to mitigate the effect on benefits and contributions, that path is not prudent fiscal pension policy. For example, the model of a 40-year amortization period shows that PERA’s funding levels remain flat for decades before finally turning upward. This means PERA’s unfunded liability will grow for decades before decreasing.

Full funding in 30 years is fair to all generations of public employees. The average service period for a PERA member is 23 years at retirement. If the length of time to pay off PERA’s unfunded liability were to be extended, it would also spread the cost of paying down the liability over a 40-year time period. In doing so, there would essentially be a transfer of cost to future generations who may well receive no benefit.

Full funding in 30 years helps the State’s credit rating. Standard & Poor’s has indicated the State’s credit outlook will be downgraded unless a plan to retire PERA’s unfunded liability is developed. Extending the period to pay down the unfunded liability to beyond 30 years does not meet the criteria stated by S&P. A credit rating downgrade would raise the cost of borrowing capital for the State and cost Colorado taxpayers.

While the PERA Board has no legislative authority, it does have expertise. The proposal offered by the Board last fall was intended to offer the foundation for the conversations that are underway now at the Capitol. But the fact that the bipartisan SB 200 was introduced with the 30-year funding timeline indicates that lawmakers agreed with the assessment of the PERA Board and its many expert consultants.

As the conversation surrounding the destination of SB 200 continues, the 30-year goal line should remain intact, reflecting the qualities of being sensible, equitable, and achievable.

PERA works for Colorado stakeholders

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New research released last week by the National Institute on Retirement Security (NIRS) in partnership with NRTA, AARP’s Educator Community, provides a snapshot of the economic impact of pensions in Colorado, outlining the importance of a defined benefit plan to attract and retain teachers, and the economic impact of spending by PERA retirees. This updated research builds on the NIRS Pensionomics report published in 2016.

Highlights include:

  • Pensions in Colorado provide $6.3 billion in economic output from retirees’ spending in the state.
  • Public retirees spending their retirement income in Colorado support 41,719 jobs.
  • An additional $1.2 billion in federal, state, and local taxes are generated by public employee retiree benefits.
  • $1 in employer contributions to public retirement plans in the state generates $6.82 in economic output.
  • Pensions play a fundamental role in retaining high-quality, experienced teachers in Colorado classrooms.

Download the Colorado-specific fact sheet here.
See other state fact sheets here.
Review the NIRS Pensionomics data on Colorado here.

Previous PERA on the Issues posts:
Retiree spending boosts Colorado’s economy, sustains jobs
The Economic Impact of Colorado PERA

Retirement Roundup: State and local pension plans continue to evolve

Posted on by planeteria

A digest of timely information and insight about finance, investing, and retirement.

Response to Pew report, The State Pension Funding Gap | National Association of State Retirement Administrators
The vast majority of public pension plans have assets to continue paying benefits for decades, according to a recent statement from the National Association of State Retirement Administrators (NASRA) in response to recently published research on public plans from The Pew Charitable Trusts. Nearly all states have made changes in recent years to benefit levels, financing structures, and actuarial methods and assumptions to preserve or restore their sustainability. Many of these reforms and adjustments result in near-term cost increases while advancing long-term sustainability, and have been recommended by Pew in the past. States and pension plans can be expected to continue to make changes as necessary to ensure their sustainability.

Public-sector pension changes create residual effects | PlanSponsor
A new Issue Brief publication from the Center for State and Local Government Excellence (SLGE) seeks to answer the broad and challenging question, “How Have Pension Cuts Affected Public Sector Competitiveness?” The analysis explores the impacts of public pension reform from 2005 to 2014, finding some statistically significant evidence that cuts to pension benefits have reduced the ability of public-sector employers to compete with private-sector employers for workers. As the organization points out, there is a growing need for states and localities to consider in detail how pension benefit reductions may impact public-worker recruitment and retention, and whether more analytical work can/should be done to further examine the workforce impacts of pension cuts. Read the Issue Brief.

1 million Americans are counting on Congress to save their pensions |CNN Money
More than 1 million workers and retirees could lose their pension benefits within 20 years. Many of them were construction workers or truck drivers who belonged to a union and paid into pension funds set up to cover workers from multiple employers. But about 100 of these pension plans are expected to run out of money in the next two decades, according to a report from the Center for Retirement Research at Boston College. Lawmakers on both sides of the aisle agree that something must be done. A bipartisan committee headed by Republican Senator Orrin Hatch and Democratic Senator Sherrod Brown was created earlier this year with a mandate to come up with a legislative fix by November. “A number of the country’s biggest multiemployer pension plans are approaching insolvency, which poses a threat of small businesses going bankrupt, retirees seeing their benefits cut, and taxpayers getting stuck footing the bill,” Hatch said in a statement. (The Senate Finance Committee is currently accepting public comment.)

Retirement surprises: What retirees wish they had known | Yahoo! Finance
Retirement isn’t exactly as expected for many, with surprises including a younger-than-expected retirement age and higher health care costs, according to the Wells Fargo/Gallup Investor and Retirement Optimism Index. Nearly one quarter of retired investors say they stopped working earlier than they’d have liked, which, according to Joe Ready, head of Wells Fargo Institutional Retirement and Trust, is a reason to consider different retirement scenarios in their planning. “Life events happen, and people don’t always get to choose when they retire — which is why it’s important to have a well thought-out plan that maps out different retirement age scenarios and projected costs in retirement,” said Ready. The average retirement age of those surveyed was 62, significantly below the age of 70 to which many are being encouraged to continue working to maximize savings and their Social Security benefits. Twenty-seven percent of men, and 19 percent of women, felt that their retirement age was earlier than they would have hoped.

How retirement investors can protect themselves — even without a fiduciary rule |MarketWatchA court may have blocked implementation of the fiduciary rule, but retirees can still protect themselves. That’s referring to the Department of Labor’s rule that, until it was blocked in mid-March by a U.S. appeals court, would have legally bound brokers and advisers who handle retirement accounts to act in the best interests of their clients when they receive any compensation. Though that court ruling isn’t necessarily the final word on the matter, some are now predicting that the rule will never get implemented. To be sure, some think this is a good outcome, while others are lamenting it. But the point of this column is not to take a position either pro or con on the fiduciary rule but instead to show how you can still arrange it so that you are just as protected as you would have been had the fiduciary rule gone into effect.

The States’ Retirement-Savings Social Experiment |GoverningSeveral states are undertaking what amounts to a significant social experiment, one that leaders and policymakers in other states will want to watch closely. Concerned about private-sector employees’ lack of retirement savings and the potential impact on poverty levels, and subsequently on state budgets, legislators in nine states — California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, Oregon, Vermont, and Washington-have enacted programs designed to remedy both problems. They have good reason. Unlike most government employees, more than 30 million of the nation’s private-sector workers — about a third of the workforce — lack access to a retirement savings plan through their jobs. While some of these employees may have other savings vehicles, such as individual retirement accounts (IRAs), research by The Pew Charitable Trusts has shown that only 28 percent of those without access to an employer-provided plan have any retirement savings at all.

PERA reform legislation passes Colorado Senate

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After two committee hearings, a spirited preliminary debate, and remarks from legislators prior to the final vote, major PERA reform legislation gained final approval by the full Senate last week. If passed, SB 18-200 would impact every current and future PERA member and beneficiary.

Below is a breakdown of the bill’s path through the legislative process.

Senate Finance Committee
After over four hours of testimony on the bill on Tuesday, March 13, the Committee delayed the amendment phase and final vote. When the hearing continued on Thursday, March 15, they considered four amendments. Two of the amendments, which both passed by votes of 3-2, removed language that would have increased employer contributions beginning in 2018, as well as the employer contribution increases that were part of the automatic adjustment provision. Another amendment, which passed without objection, clarified that the four members of the proposed public pension oversight committee who are “experts in the area of pensions or retirement plan design” would not be legislators, and therefore would not have the power to vote on matters before the committee. The only amendment that did not pass out of Senate Finance would have removed the provision in SB 18-200 expanding the option of choosing the defined contribution plan to all new hires. The committee members voted 4-1 to refer the amended bill to Senate Appropriations.

Senate Appropriations Committee
With no public testimony, the Appropriations Committee hearing was quick. One amendment appropriated $200,000 of general fund money which may be used by the legislative council for an “independent review of PERA assumptions.” The committee voted 4-3 to advance the amended SB 18-200 to the floor of the Senate.

Senate floor
The full Senate debated SB 18-200 over the course of two days; Friday, March 23 and Monday, March 26. During the debate, several amendments were considered, but only two passed: (1) removing the provision to adjust retirement eligibility for current members (PERA Interim Executive Director Ron Baker expressed concerns about this provision during the Senate Finance Committee hearing) and (2) moving up the implementation date from 2020 to 2019 for allowing eligible new members to opt-in to the defined contribution plan. On Tuesday, March 27, the full Senate voted 19-16 to send the bill, as amended, to the House of Representatives.

What’s next
SB 18-200 has been introduced and assigned to the House Finance and House Appropriations Committees. A hearing has been set for Monday, April 16 at 1:30 p.m. Once the hearing starts, everything will begin anew: public testimony, consideration of amendments by committees and the full house, and, if the bill continues to pass through the process, eventually final approval from the House. If the House version of the bill differs from the Senate version—and all indications are that it will—then the Senate will be asked to concur with House amendments and send the bill to Governor Hickenlooper, or a conference committee of members of the House and Senate will be formed to try to forge a compromise that can win the support of both chambers. All of this must happen prior to Wednesday, May 9, which is the final day of the legislative session.

As always, for up-to-date information on SB 18-200 and any other PERA bills that might still be introduced, check back with PERA on the Issues.

See this fact sheet for a comparison of the PERA Board’s recommendation and SB 18-200.