Reuters Money

Retirement confidence falls, especially in Social Security: Poll

Talk about a race to the bottom: Which institution do you think is losing the trust of Americans to provide future retirement benefits most quickly – government, or private employers?

The winner is . . . private employers, but not by much. A new national poll on retirement sentiment by Sun Life Financial Inc. finds worker confidence in the future value of employer-provided benefits plunged 32 percent in the past year. Meanwhile, confidence in the government’s ability to provide Social Security and Medicare benefits fell 22 percent.

Sun Life’s fourth annual Unretirement Index points to a sharp deterioration in Americans’ overall confidence about their ability to retire. The survey’s overall retirement confidence index fell nearly 20 percent to an all-time low compared with a year ago. Like several other surveys this year, the poll underscores the national mood of deep worry about financial security, especially in old age.

Along with worries about workplace and government benefits, only 23 percent of working Americans said they are very confident that they will be able to meet basic living expenses in retirement — plunging from double that number (42 percent) last year. And one in five workers said they will never retire.

The falling confidence in employers to provide benefits such as defined benefit pensions or health insurance “reflects a sense people have that an employee benefit is discretionary,” said Wes Thompson, president of Sun Life Financial.

“But the broader underlying trend is a shifting of responsibility to the individual – whether it’s from government or employers. That starts with the shift in recent years from defined-benefit to defined contribution plans, and much greater dependence over the last 10 or 15 years on employees to contribute more for their health care. Now it’s spreading to other areas of employer-paid benefits, such as life insurance and disability benefits.”

Thompson thinks falling confidence in Social Security and Medicare stems from the “public policy debate in Washington.” Indeed, we’ve seen repeated calls this year for a higher Social Security retirement age, reduced cost-of-living adjustments and a higher eligibility age for Medicare.

“Retirement Heist” book asks: Who stole America’s pensions?

Can we afford retirement in this country? Not if you believe politicians who claim entitlement spending is out of control and that the economy is being dragged down by our aging population.

I don’t buy it. Soaring healthcare spending is a critical problem, but not only because our population is aging. And Social Security is affordable as a percent of GDP — it’s equal to 4.7 percent of GDP this year, and will slowly rise to 5.3 percent by 2021, according to the Congressional Budget Office.

Now comes an important new book that debunks another retirement myth: Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers (Portfolio/Penguin). Written by Ellen E. Schultz, an award-winning investigative reporter for The Wall Street Journal, the book takes on the often-heard claim that private employers no longer can afford to provide traditional defined benefit pensions.

Schultz’s thesis is that the near disappearance of defined benefit pension plans in the private sector didn’t have to happen at all.

“It wasn’t an accident,” Schultz says in an interview. “It is the result of actions companies took starting in the 1990s to profit from their plans. Employers took perfectly healthy plans with a quarter trillion dollars in aggregate surpluses, and they siphoned out the money through a variety of means.”

The result has been a severe decline in private sector defined benefit (DB) coverage.

The percentage of Fortune 1000 companies with at least one frozen DB plan (where the sponsor company retains the plan but stops future accruals for all or some workers) more than quadrupled between 2004 and 2010.

Retirement solvency “a growing challenge” says GAO

The risk that retirees will outlive their assets is a growing challenge, the federal Government Accountability Office said in a not-so-newsy report released on Friday. To meet that challenge, experts advise retirees to delay the start of their Social Security benefits, avoid spending down their nest eggs too fast and consider using annuities in some situations, says the study.

The report could be used to nudge forward policy initiatives already under consideration that would encourage companies to offer annuity choices to their retiring workers. The report was requested by Senator Herb Kohl, chairman of the Senate Special Committee on Aging. He has cosponsored a bill, called the Lifetime Income Disclosure Act, that would require 401(k) statements to include an annuity equivalent number — the amount of monthly income that the savings accumulated would support.

The Treasury Department has asked for public comment on the idea that employers, given some safe harbor against lawsuits, could encourage workers with 401(k) accounts to annuitize their savings. Mark Iwry, the Treasury Department official who has been looking at these retirement issues, commented in a letter to the GAO. “We will take the information and analysis in the report into account as we consider guidance to issue.”

To conduct the study, the GAO created sample retiree profiles at varying income levels, with and without defined benefit pension plans. It then asked a host of experts within the financial services industry, academia and a “retiree interest group” (I’m going to guess that it was AARP) how they would advise retirees with those profiles to protect their income for the long haul.

The experts generally recommended familiar strategies: (1) leave your money in your defined benefit plan and take an annuity instead of a lump sum; (2) make systematic (and not unreasonably high) regular withdrawals from your savings; (3) delay the start of your Social Security benefits; and (4) consider buying an income annuity to cover some basic expenses for the rest of life.

The GAO also surveyed retirees to see if they were following that advice and found, in general, that they were not. Roughly half of retirees take their Social Security benefits before their 63rd birthday, according to data cited in the report.

The experts surveyed by the GAO suggested that middle-net worth households that did not already have a defined benefit plan could gain the biggest advantage from buying income annuities, in which a sum of money buys a guaranteed lifetime monthly stream of income. “They should consider using a portion, such as half of their $191,000 in financial assets to purchase an inflation-adjusted annuity,” the report says, noting that it would provide an additional $355 per month until the death of the last surviving spouse, and grow in subsequent years with the Consumer Price Index.

Obama plan to shore up pension insurance fund stirs controversy

Can you count on your pension when it’s time to retire? I get that question often from private sector workers worried about their pension plans in the wake of the financial crisis and 2008 market meltdown.

They’re surprised when I tell them not to worry. Nearly all private sector defined benefit (DB) plans are backed by the Pension Benefit Guaranty Corporation (PBGC), a little-known federally sponsored agency that insures nearly all private sector plans. If you work for a company that goes belly up, the PBGC takes over the plan and its obligations; while some higher-income workers take a haircut on benefits in those situations, most workers get 100 percent of promised benefits.

By law, the PBGC is funded entirely through insurance premiums paid by plan sponsors. But the agency has been chronically underfunded due to a mismatch between the premiums charged and the risks it manages. Premium levels are set by Congress, and PBGC has no control over the type of risk it insures. “The PBGC is a rare kind of insurer, in that it has no control over its risks or what it can charge ,” says Douglas Elliott, a fellow in economic studies at The Brookings Institution.

In 2010, the PBGC paid out nearly $6 billion in benefits to more than 800,000 beneficiaries; it’s also responsible for future payments to another 700,000 workers who haven’t retired yet. Plan sponsors currently pay a flat-rate annual premium of $35 per plan participant, plus another $9 for each $1,000 in underfunding. That figure varies considerably among plan sponsors, but averages out to a total annual premium of $65 per year for each employee.

The PBGC reported a gap of $23 billion between assets on hand and its long-term obligations to pension recipients for the federal fiscal year 2010. The agency has plenty of money to meet its near-term obligations, but worries about PBGC flare whenever very large plans run into trouble. For example, if the federal government hadn’t bailed out General Motors and Chrysler, PBGC’s assumption of the companies’ pension obligations would have roughly doubled the agency’s funding gap.

The Obama Administration’s 2012 budget proposal calls for a $16 billion boost in premiums over 10 years – but also seeks permission for PBGC to set premiums without Congressional approval, via a process similar to the one used by the Federal Deposit Insurance Corp. PBGC also proposes developing a new approach to risk-based pricing for weaker pension plans.

That approach is endorsed by the President’s National Commission on Fiscal Responsibility and Reform, which identified the PBGC’s long-term imbalance as a threat to the federal government’s financial health and expressed concern that a government bailout of the fund might be needed at some point.

How big is the public pension funding gap?

California is facing a whopping $26.6 billion deficit, but budget discussions this week focused on a question that might sound small: whether the state’s public retirement system should cut its assumed future return on portfolio investments from 7.75 percent to 7.5 percent.

The California Public Employees’ Retirement System (CALPERS) decided to hold steady at 7.75 percent — and the impact was significant. It meant the pension fund won’t have to dip into general revenues for an additional $200 million or more.

The CALPERS decision underscores an ongoing debate about the size of unfunded public sector pension liabilities as battles rage in state capitols between elected officials and employee unions: What is the proper assumption for return on portfolio investments over time?

The debate isn’t academic; the return assumptions are critical in determining the size of unfunded public sector pension liabilities.

Most state and municipal pension funds assume a long-term rate of return around eight percent, reflecting a portfolio invested in equities, bonds and alternative assets such as hedge funds. That number reflects the approach preferred by actuaries. It’s supported by actual investment history, and it’s endorsed by the Governmental Accounting Standards Board (GASB), the independent accounting and financial standards reporting group for state and local governments.

Economists, meanwhile, prefer a more conservative approach adhering to standard financial theory: cash flows should be discounted at a rate that reflects their risk. Measuring pension funds, that requires use of a “riskless rate of return” assumption reflecting what could be earned on Treasuries or corporate bonds, around four to five percent.

Joshua Rauh, an associate professor at the Kellogg School of Management at Northwestern University, says the riskless rate method pegs aggregate unfunded liabilities of state and local governments north of $3 trillion — a sum larger than the overall $2.6 trillion of debt on state and local government balance sheets. The GASB-endorsed eight percent assumption indicates a smaller $1.3 trillion aggregate funding gap, he calculates.

Pros beat the little guy in navigating 2008 bear market: survey

Step one: Take professional money managers responsible for the portfolios of large pension funds, and throw them into a vicious bear market.

Step two: Let them compete against individual retirement investors to achieve the best rate of return. Who are you going to bet on?

In the bear market of 2008, the smart money would have been on the professionals who manage the portfolios of defined benefit (DB) pension funds. Rates of return on DB plans that year beat the aggregated results of defined contribution (DC) plans — chiefly 401(k)s — by the widest margin since early in the last decade, according to a new study.

DB and DC plans both lost about one-fourth of their value in that year’s market meltdown, but DB plans outperformed 401(k) plans by nearly three percentage points, according to the study by Towers Watson, the employee benefits consulting firm.

DB plans had median investment returns of -23.44 percent in 2008, while DC plans had median returns of -26.12 percent. Earlier Towers Watson studies found that, over time, DB plans consistently outperform DC plans. The most recent comparable large margin in returns was during the last bear market (2000 – 2002), when DB plans outperformed DC plans by roughly 2.25 percentage points.

The findings reflect data from more than 2,000 plan sponsors, each of which had a single DB and DC plan.

Separate tracking by Towers Watson of 97 companies shows that DC plans outperformed DB plans in 2009. Both DB and DC plans rebounded strongly that year, with both types of plans experiencing positive returns. DC plans had median investment returns of 19.11 percent, slightly outpacing returns for DB plans (18.5 percent). This marked the first time since the dot-com era and the 1995 – 2000 bull market that DC plans outperformed DB plans.

Wisconsin points to need for Great American pension revival

Wisconsin’s Scott Walker and other Republican governors are counting on taxpayer support in their battles to cut state workers’ bargaining rights, pay and pensions. But public opinion favors the unions, because government workers aren’t the only ones worried about economic security these days — especially where retirement and pensions are concerned.

A national poll by Mathew Greenwald & Associates to be released next week shows Americans are in a state of near panic about retirement security. The research was commissioned by the National Institute on Retirement Security (NIRS), and covered a representative sample of all age groups. I see plenty of foreboding retirement sentiment surveys, but the NIRS findings are especially grim, and suggest that the financial meltdown and Great Recession simply have beaten expectations straight into the ground.

In short, most Americans now equate retirement security with mere survival:

Generally, Americans consider a secure retirement simply surviving or living comfortably (34 percent), paying their bills (17 percent), maintaining their pre-retirement lifestyle (11 percent), and paying healthcare and health insurance costs (8 percent). Only 11 percent expect retirement to include leisure, travel, restaurants, and/or hobbies.

Just as striking, the poll shows that Americans finally understand that the massive shift out of defined benefit (DB) pensions — the kind workers in Wisconsin are fighting to defend — are a big part of our retirement security problem.

DB pensions are more inclusive — all employees are automatically enrolled. Efficiencies stemming from pooled contributions and investments, and lower management fees, make them about 46 percent more efficient in delivering a desired benefit outcome, NIRS research shows. DB plans also are “ageless” in that there’s no need to adjust portfolio allocations to match an individual’s retirement needs. That allows plans to keep their portfolios balanced for maximum return.

Nearly nine out of 10 poll respondents said the retirement system is “under stress and needs reform,” and nearly three-quarters say stock market volatility makes it impossible to predict how much money they will have at retirement.