Reuters Money
Why Social Security COLA cuts will whip up a fight
If you want to tick off a senior, just mention Social Security’s cost-of-living adjustment (COLA). The COLA has been on auto-pilot since 1975, when the first automatically-adjusted benefit adjustment was made, using a formula tied to the Consumer Price Index. A COLA was awarded every year from that time until 2008, but since then — nada.
Uncle Sam’s stinginess resulted from a quirky spike in the CPI-W — the index now used to determine the COLA — in the third quarter of 2008. Just before the economy crashed, the CPI-W spiked temporarily due to a big increase in energy prices. The result was a whopping 5.8 percent COLA for 2009. Social Security payments can’t rise until the CPI-W exceeds the 2008 level — and they can’t fall under federal law — so benefits were held level in 2010 and 2011.
A 1.1 percent COLA is forecast for 2012 by the Congressional Budget Office (CBO). But debate is heating up in Washington about further changes that could enrage seniors anew.
Several of the key federal deficit reduction plans that have been advanced in Washington recommend shifting to a measure of inflation called the “chained CPI.” A chained index reflects changes that consumers make in their purchasing across dissimilar items in response to price changes; the theory is that a spike in gasoline prices will prompt consumers to spend less on fuel, perhaps more on food. And so on.
The chained CPI could be applied to federal benefit programs and to the income tax code — although it stands to generate far more benefit cuts than revenue gains.
On the benefit side, a chained CPI would impact Social Security, civilian and military pensions and veterans’ benefits and Supplemental Security Income. On the revenue side, a chained CPI might be applied to inflation adjustments for tax brackets in the personal income tax code, effectively serving as a stealth tax hike by reducing tax bracket adjustments and subjecting more of individuals’ earnings to higher tax rates over time.
According to the CBO, benefit adjustments could yield $217 billion over 10 years, with 52 percent of that — $112 billion — coming from reduced Social Security COLAs; income tax bracket creep would generate $72 billion.
“War for talent” has employers ramping up employee benefits: survey
If there’s a silver lining to be had following the financial crisis that shook the global economy in 2008, it’s this: more employers are feeling increasingly responsible for the fate of their employees — and that’s translating to more comprehensive employee benefit plans, a new survey finds.
The downside? Nearly 60 percent of the employers polled say most of their employees fail to take advantage of the resources available to them.
“The disconnect we’re seeing today… is that despite the fact that employers are making financial education and advice programs available to employees, many employees do not engage in these programs because they do not find the information relevant enough to them personally,” says Andy Sieg, head of retirement services for Bank of America Merrill Lynch, which commissioned the survey.
Despite the fragile economic recovery and high jobless rate, the labor market is in a so-called “war for talent,” Sieg says. In fact, a recent report from the American Society for Training and Development found that by 2015, 60 percent of all new jobs will require skills held by only 20 percent of the population. Add in the fact that two out of three employees at big companies are looking for the exit sign, Deloitte reports, and there’s legitimate reason for employers to be jittery about losing top talent. As a result, workplaces are ramping up efforts to not only attract younger employees, but to retain older employees for a longer period of time.
Among the efforts underway:
- 50 percent of employers surveyed offer flexible or customized work schedules
- 33 percent are implementing retirement and healthcare education
- 22 percent are giving employees the chance to work remotely
- 21 percent are offering extended benefits to older workers
With Social Security worries plaguing Americans, employers are beginning to recognize the need for a workplace benefits program that goes beyond the standard auto-enrollment plan.
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Don’t count on your employer for accurate pension info
A U.S. Supreme Court ruling sent an important reminder to retirees this week: you can’t necessarily rely on your employer for an accurate description of your pension benefits.
The court issued a ruling in Cigna v. Amara, a closely-watched case dealing with the health insurance company’s defined benefit (DB) pension plan for its own workers. Cigna had converted its DB plan into a hybrid cash balance plan, but provided incorrect information about benefits owed to employees when the conversion took place.
Central to the case is the company’s Summary Plan Document (SPD) — a short-form description of plan benefits that employers distribute to beneficiaries when they first become covered, and when material changes are made to the plan. Cigna admitted in court that its SPD was misleading, but disputed the contention that all 27,000 members of the class action lawsuit suffered “likely harm.”
Two lower courts had backed the plaintiffs’ contention that they should receive the benefits as described in the SPD. The Supreme Court ruled that nothing in the Employee Retirement Income Security Act (ERISA) permits a court to alter the terms of a pension plan, but the high court also sent the case back to the district court to determine how to remedy the problem.
Legal experts differed yesterday on whether the ruling was a win for Cigna and other plan sponsors, or for the beneficiaries — although pension advocates were confident the decision ultimately will produce a victory for employees when the lower court ultimately rules.
“This ruling says that if you are a plan trustee and deliberately mislead beneficiaries, they can sue you for monetary damages,” says Karen Ferguson, director of the Pension Rights Center. “The standards laid down by the Supreme Court in this decision make it likely that the Cigna employees and retirees will get the pensions that they had been led to believe that they would get.“
But no matter how the case turns out, the legal battle serves up a clear cautionary reminder to private sector workers participating in DB plans — namely, that you can’t take your SPD to the bank.
5 ways to make 401(k) plans more like pensions
It may feel as though 401(k)s have been around forever, but they’ve only been with us since the 1980s (okay, maybe that is forever). Until the 401(k) came along, if you had a workplace retirement plan it came in the form of a traditional defined benefit pension.
Employees didn’t need to do much. Employers made contributions and managed the pension funds. When you started a job, enrollment took place automatically; when you retired, regular checks started coming in the mail and continued for the rest of your life.
The 401(k) actually got started as a loophole in tax law that gave taxpayers a break on deferred income. Its name is taken from a section of the Internal Revenue code that made the accounts possible. But plan sponsors soon realized the 401(k) language provided the basis to offer voluntary workplace savings plans using a pretax payroll deduction. Shifting to defined contribution (DC) retirement benefits would allow employers to lose the cost, risk and administrative hassle associated with defined benefit (DB) plans.
The rest is history. The 401(k) took off, and DB pension coverage plunged.
How’s that working out for you? Probably not so well. The annual Retirement Confidence Survey from the Employee Benefit Research Institute finds that Americans’ confidence in their ability to afford a comfortable retirement has hit a new low. The percentage of workers who say they are “not at all confident” about having enough money for a comfortable retirement grew from 22 percent in 2010 to 27 percent, the highest level measured in the study’s 21-year-history.
But mourning the decline of private sector defined benefit pensions won’t bring them back. So a group of industry professionals convened a working group, the Retirement 20/20 Initiative, to brainstorm ways to get defined contributions to look — and behave — a bit more like defined benefit plans by generating reliable income streams in retirement. The group includes actuaries, economists, employers, participant advocates, investment experts and academics researchers.
“Employers, individuals, society and the markets all have a stake in this,” says Emily Kessler, a senior fellow at the Society of Actuaries who leads the Retirement 20/20 initiative. “It’s in society’s interest because money we spend to support the elderly is money we don’t spend on children and other things. We need to make sure everyone has an adequate source of retirement savings and income, so that we don’t have to use taxes to support retirement.”
While it’s true that legislation such as the Pension Protection Act have allowed recordkeepers and employers to make 401(k) plans more like Pension Plans, I would argue that the industry is not quite at the point of being able to offer those plans at a total cost of 0.20% as indicated by Brightscope. Only those companies that are paying the cost(and not putting them to their employees) are able to offer plans at that level. In other words, the 0.20% is reflecting only the investment cost and no cost for administration(which is hopefully being born by the company that sponsors the plan) This will be an interesting issue in the future as the participants inside of 401(k) plans are exposed to the true costs they pay. Does it make sense for companies to come to the conclusion to pay more of the cost of administration/recordkeeping of the 401k plan, leaving only the investment cost to the individual participant. That seems to be a fair trade for the company to cover those costs versus the high administration, actuarial, and investment costs that they had to pay only a short three decades ago when our parents and grandparents had pension plans.
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.
When Republican presidents destroy the social programs, it’s all good (GWB / Medicare D). But when a fiscally responsible Democrat wants to make sure the system functions correctly, suddenly it’s a dictatorship. Let’s take a gander at what else Obama has been accused of dictatoring since he was sworn in:
1. The Health Care Law which requires everyone to get medical insurance through a PRIVATE insurer, unless you are already happy with the insurance you have (yay dictatorship)
2. For creating the Consumer Financial Protection Bureau (oh the horrors!)
3. For doing everything he can to get rid of discriminatory laws against the LGBT (oh no he hates religion!)
Seriously, is there anything that Obama’s critics can say that anyone (outside of Bellview Hospital) believes?
Targeting investment returns: Secrets from the pros
This piece by Nanette Byrnes originally appeared on Portfolioist.
What rate of return can we realistically expect from our investments? Seven percent? Eight percent? 12 percent?
This is no academic brain teaser to anyone saving for retirement or a down payment. It’s not easy to get right, and getting it right is critically important.
Guess too low, and you end up with a dour view of your chances of making your financial goal. Guess too high, and you could end up in dire straights.
If it’s any consolation to the amateur investor, the pros often can’t agree on the ideal rate of return either.
Fighting over investment returns in California
Retirement: 3 problems with automated 401(k)s
Automation of workplace retirement plans has spread rapidly in recent years. But don’t make the mistake of taking your foot completely off the gas pedal if your employer has installed retirement cruise control.
The Pension Protection Act of 2006 (PPA) set the stage for plan sponsors to step up automatic opt-in enrollment for new workers, and it’s resulted in much higher plan participation rates. Growing adoption of other automation features have helped to address the hard reality that most workplace retirement savers pay little or no attention to their contribution levels, rebalancing or mutual fund selection.
But automation comes with drawbacks that can hurt long-term performance of your retirement portfolio. If you’re using default options, it’s time to start paying attention — and watch out for these three potential potholes:
One: Low default contribution rates
More than half of large plans set initial contribution rates for auto-enrolled workers at three percent, according to a survey of large defined contribution plans by the the Defined Contribution Institutional Investment Association (DCIIA), a non-profit industry consortium focused on the institutional retirement industry. This despite the fact that survey respondents acknowledge that the optimal rate is 10 percent or more.
The disconnect stems from a PPA provision that defines three percent as the contribution rate that provides safe harbor protections for plan sponsors, says Cathy Peterson, director of retirement insights at J.P. Morgan Asset Management and co-author of the DCIIA study. “Many plan sponsors don’t want to be out of line with the industry,” she says. “The three percent rate is viewed as the benchmark.
The economy also plays a role. Eighteen percent of respondents said higher initial contribution rates would require them to make higher matching contributions that they can’t afford right now.
401k automation tools such as auto-enrollment, auto-escalation, and auto-default into an appropriate investment portfolio are merely tools that plan sponsors may use to reach a defined objective. Simply implementing any or all auto-features without a clear understanding of the desired result could actually do more harm than good to plan participants.
A number of considerations must be made when implementing auto-features because many plan features and provisions are interrelated. For example, most plan sponsors do not consider the impact of their current distribution provisions when considering a target date fund glidepath. Many target date fund glidepaths assume that a participant will stay invested throughout their retirement years. However, the vast majority of 401k plans do not allow for systematic withdrawal. Instead, once a retired participant needs to initiate a distribution, most 401k plan sponsors require the distribution to be taken in a lump sum, thereby causing disconnect between the intent of the target date fund glidepath and the plan’s distribution provision.
Automatic features are indeed terrific tools that help plan sponsors efficiently help their employees participate and invest in their 401k. However, like any tool, if misused, they can lead to unintended damage to participants’ retirement readiness.
Sanders Booze Capital Advisors, LLC
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.
What good does it do to vote? Obama was overwhelmingly elected on a platform of ending our wars, and then he escalated them. Now, he is seriously considering starting yet another war.
As long as our “safe seat” electoral system is not changed, what the voters think will not matter. Political “contributors” get to buy elections by splitting contributions between both sides. And there are only two sides. And you cannot (shock!) tell them apart. None of this is in the Constitution either.
Deficit, unemployment top investor concerns: poll
The staggering budget deficit and troublesome unemployment rate are the top concerns for both investors approaching retirement and those already basking in their twilight years, according to a new Wells Fargo/Gallup poll.
Among the more than 1,000 investors surveyed, 71 percent said the nine-percent unemployment rate and the deficit — forecast to reach $1.48-trillion this fiscal year, or 9.8 per cent of GDP — is hurting the investment climate “a lot.”
“The way we interpret that is clearly investors see the burden of debt at the household level and what it means and they’re thinking about it at the federal level and projecting it into their investment outlook,” says David Carroll, senior vice president and head of Wells Fargo Wealth, Brokerage and Retirement.
Among the poll’s other findings:
- 60 percent said they are concerned over the price of energy
- 58 percent cite “the financial position of state and local governments” as a factor hurting the investment climate
- 51 percent cite a “politically divided federal government” as a concern
- 46 percent are concerned about home price values
- 38 percent are concerned about the availability of credit
Despite the grim state of the federal fisc, investors remain confident the economy will turn around. The optimism index rose to 42 in February, up from its all-time low of -64 in February 2009, but well below pre-crisis levels. Overall, 62 percent of investors say it is a good time in invest in financial markets.
“When we had the market bottom in 2009, people went to the sidelines. Inherently, there is an urge to put money to work, but we’ve had these episodic shocks with the flash crash last year, the European debt crisis and now we’ve got energy. There seems to be a regular drum beat of things popping up that keeps people from engaging,” says Carroll.
Will higher interest rates save retirement for seniors?
The recent bond market rout may be bad news for bond investors and anyone planning to refinance a mortgage anytime soon. And it’s certainly not what Federal Reserve Chairman Ben Bernanke had in mind when the Fed launched its massive $600 billion bond-buying spree.
But if the trend toward higher interest rates continues, it will be very good news for retirees starved for low-risk return on their portfolios.
Ultra-low interest rates have helped banks, corporations and government to stabilize in the wake of the 2008 financial crisis, but they’ve been nothing but bad news for retirees. People living on fixed incomes have been forced to cut expenses, eat into principle or rely on higher-risk fixed income investments or stocks.
The problem isn’t limited to interest rates. The erosion of traditional defined benefit pensions means that just 20 percent of private sector workers can count on monthly pension income. And Social Security is replacing a smaller percentage of income due to the increasing full retirement age implemented in 1983, rising Medicare Part B premium deductions and more Social Security income is subject to income tax.
Inflation also poses a big threat to retirees. Social Security hasn’t paid a cost-of-living adjustment for the past two years and its formula doesn’t recognize the higher rates of medical inflation experienced by seniors. Near-zero interest rates on money market funds and certificates of deposit exacerbate inflation’s impact.
But rising rates could yield a big change in the outlook for retirement security. Barry Glassman, president of Glassman Wealth Services, thinks that’s just where we’re headed. “We’re coming to an end, in the near term, of the Fed artificially keeping rates low. And high deficits mean the supply of debt from the government won’t stop – but demand from the Fed to buy it will. “That means we’ll see interest rates heading higher – not into the stratosphere, but a plateau higher than we’re at today. It could take 18 to 24 months, or it could happen in six months.”
Glassman argues that “retirement could be saved for a lot of people” if long-term certificates of deposit get to five percent sometime in the two years. “If retirees can earn 5 percent with very low risk, that will be very competitive with a higher-risk option like stocks. At that interest rate, there will be a huge wave of demand from retirees who will want to lock in at that rate for 10 years. They’ll take money out of money markets and the stock market to do it.”
This article represents wishful thinking on behalf of retirees. Where is the critical analysis? Since the Fed is keeping rates down explicitly in order to ‘stimulate’ (sic) the economy, where is the discussion about if/when that action is no longer needed? If the banks have black holes for balance sheets (mark-to-model RE debt that will be priced much lower than currently accounted for when foreclosed, liquidated, and marked-to-market), they will clearly need *more* money just to maintain capitalization. That money can and will *never* be ‘withdrawn,’ it is a permanent addition to taxpayer debt. What about the US gov’t needing to bail out cities and states to the tune of $1T this year, and as much or more in out years? What about the demographics of exploding unfunded pension liabilities for all public union workers that need to be flushed through bankruptcy to save government budgets at all levels? How long will it be before that occurs, how much more debt will be incurred?
No, the Fed is nowhere near done with QE. Since they are the primary buyer through offshore and front buyers, or through banks (who they swap new dollars to in exchange for more bad MBS debt, so the banks then buy the newly issued bond debt, giving the taxpayer the luxury of paying interest to the very sots who put us into this mess), it is clear the Fed is on a mission to ‘save’ the banks by the tax of inflation and interest payments by the taxpayer. But if the Fed lets rates rise even a percent it could break the finances of the government.
No, we are on a path of QE for many years to come. We have turned Japanese. There is no ‘happy path’ the Fed can manipulate to get us out of the need to liquidate all the bad debts and malinvestments. They are simply dragging it out slowly in hopes of not crashing the system. But the bill is due, and someone is going to pay it: the taxpayer. And you can take THAT to the bank.
The chained CPI is really the Alpo Index. It will move retirees from NY Strip to canned dog food, while telling them nothing has changed. They will end up on a Bangladeshi diet. Remember the frog in the water pot, not jumping out as the heat is gradually turned up until he is eventually cooked to death.
Why not increase the earnings of the trust fund by allowing the trustees to invest in U.S. government guaranteed debt. No increase in in risk, but a slight increase in return. Then allow the trustees to invest their funds in U.S. treasuries anywhere on the yield curve.
Retirees are already subsidizing the younger generation by getting lousy CD rates that allow the kids to get cheap mortgages.
It wasn’t retirees who caused the mortgage mess, yet Ben Bernake through 0% interest rates is forcing retirees to suffer for the kids. That is enough.