Pension Matters
State Employees Retirement Fund
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November 2012
Retirement Security Is Not A Luxury — It Is A Necessity
“Headlines around the country are blaming public pension plans for ongoing state and local government fiscal problems, from budget shortfalls to municipal bankruptcies. The reason for the most recent bashing is the disappointing investment returns in 2011. Focusing narrowly on one small part of a very big picture makes it easy enough to demonize public pension plans once again. But it’s also misguided and irresponsible.” The National Conference on Public Employee Retirement Systems’ 2012 Membership Study shows the 147 state and local funds surveyed in April and May saw an average one-year investment return of 12.5% — down slightly from 2011’s 13.5%.
“But longer-term investment returns — far better indicators of a plan’s health and sustainability — were all on the rise. Based on the fiscal year of each fund, in aggregate three-year returns jumped to 4.4% from -1%; five-year returns also grew to 4.4% from 3.6%; 10-year returns increased to 5.3% from 4%; and 20-year returns grew to 8.7% from 8%. “
What’s clear from the NCPERS study is that public pension funds seem to be well managed, are continuing their recovery from the recession, and are committed to long-term sustainability.
Read more about the NCPERS study at www.pionline.com or on the Lansing SERA Facebook page.
Underfunding Pensions
According to an article on the Fox Business website, Bob Williams, of State Budget Solutions and former auditor with the Government Accountability Office states “State governments have repeatedly not fully funded the actuarial-required contributions to pensions. State requirements for a balanced budget do not apply to pensions.”
Here is what the article says about Michigan
“In the past ten years Michigan appropriated $1.9 billion less than the annual required contribution to pensions. That means Michigan taxpayers have to make up the $1.9 billion that was not invested into pensions plus the lost assumed rate of return. In addition, over the last ten years the assumed rate of return was between 4-8% for the various Michigan pension funds, but the actual rate of return was only 5.6%. Taxpayers not only need to make up the difference between the assumed rate of return and the actual rate of return, but also insufficient contributions based on the false rate of return assumption”. Find out more about this issue and other state situations at www.foxbusiness.com.
“Politicians Turned Government Workers’ Hope For Secure Retirement Into A Giant Ponzi Scheme”
The title of this article is according to Roger Berkowitz of the Bard College Hannah Arendt Center at a recent International City/County Management Association Retirement annual conference. The article goes on to say that changing from DB to DC plans only fixes future costs and not current pension debt created by politicians using funds from the pension plans to pay off other debts and balance the budget. When DB plans are closed, the debt just gets bigger. Read this article at www.watchdog.org and see what you think.
Unfair Tax System Caused By Retired State Workers According To Gov. Snyder
According to Gov. Snyder’s blog, “Under the old system, our state decided to give special tax exemptions to certain kinds of pensions. Meanwhile, other people were stuck paying higher taxes, even if they earned much less money.” Read his full “explanation” for taxing pensions at www.michigan.gov.
Decoding Your 401(K) Fees
Great article in the November, 2012 Kiplinger magazine. According to an AARP poll, 71% of 401(k) participants weren’t aware that they were paying expenses and two thirds of those who knew about expenses didn’t know how much. Size matters (as in the size of the plans assets) and so does knowing the difference between a “fee” and an “administrative expense”. New fee disclosure regulations are in place so if you are not seeing them on your statements, ask why not. And take a look at the article in Kiplinger. Also check out brightscope.com for a benchmarking tool and AARP 401(k) calculator at AARP. org.
Pension And Investments Mention Our Own Deputy Treasurer
“As an attendee at the Pension Real Estate Association’s 22nd Annual Investor Real Estate Conference, Jon Braeutigam, Deputy treasurer and chief investment officer of the Michigan Department of Treasury, Bureau of Investments, and CEO/CIO for the $50 billion State of Michigan Retirement Systems, was a panelist during a session on Real Estate’s Relative Value in an Institutional Portfolio.
Mr. Braeutigam was quoted as stating, “ the Michigan pension fund is a long-term real estate investor. Some 10% of the pension funds’ total assets are in real estate. Pension plan officials view real estate as a diversifier with returns between stocks and bonds, in a perfect world. I don’t think inflation is coming around the corner any time soon although there may be modest inflation in four or five years.” Mr. Braeutigam said “his pension fund sold most of its single-family real estate investments before the financial crisis and wrote down the rest. It’s difficult to invest in single family on the equity side. There’s more opportunity on the debt side. The Michigan retirement funds have invested 5% in credit strategies including commercial mortgage-backed securities, residential mortgage-backed securities and mezzanine debt.”
“De-Risking” Pensions Could Be Risky To Pensioners
“WASHINGTON – In the wake of moves by several large companies to “de-risk” their traditional pension plans, the Pension Rights Center is calling for a moratorium on such actions until Congress can look into the risks posed by these strategies to workers and retirees. Just yesterday, Verizon joined GM in announcing that it is transferring the pensions of certain retirees to an insurance company. In addition, GM, Ford, and several other companies have made lump-sum buyout offers to certain retirees and former employees. The Center is concerned about the impact of both approaches on current and future retirees.
These employers are looking to cut costs and reduce long-term liabilities to make their companies more attractive to investors, but ‘de-risking’ can be risky for workers and retirees,” said Karen Friedman, the Center’s executive vice president and policy director. “Insurance company annuities backed by State Guaranty Associations could leave retirees with less protection than the pensions provided by their companies backed by the insurance provided by the Pension Benefit Guaranty Corporation. Also, lump sums place the burden on individuals to ensure that the money lasts throughout retirement. We need to stop, take a breath, and make sure that the retirement security of the people affected by these moves is fully protected.”
The Center plans to ask Congress to take steps to put a temporary stop to pension offloading and lump-sum buyouts to give policymakers time to examine whether these strategies could result in sellouts of retirement security.” (Pension Rights Center)
Make What You Saved Last
Many of us have socked away retirement funds in IRA accounts or 401 type accounts to keep us from eating cat food in our old age. So how do you make this money last as long as you do? Here is a paper written by the Center for Retirement Research at Boston College that might help you do that.
“This brief suggests that the IRS’ Required Minimum Distribution rules may be a practical alternative to the 4 percent rule. For financial and realistic reasons, the effectiveness of an “alternative RMD strategy” compares favorably to traditional rules of thumb. And a “ modified RMD strategy” does even better. “ Read more at http://crr.bc.edu
Medicare Open Enrollment
The 2013 Medicare Part D and Medicare Advantage plan annual Open Enrollment Period begins October 15th and continues through Friday, December 7th. During this time, you will have the opportunity to add, change, or drop your Medicare Advantage plan or Medicare Part D prescription drug plan coverage.
SSA COLA
“According to an article in USA today, preliminary figures show the 2013 benefit boost will be only between 1% and 2%, “which would be among the lowest since automatic adjustments were adopted in 1975. Monthly benefits for retired workers now average $1,237, meaning the typical retiree can expect a raise of $12 to $24 a month next year.” UPDATE: The Social Security Administration has announced that the cost-of-living adjustment (COLA) will be 1.7%.
ORS Updates
Just a reminder that the Michigan income tax rate changed from 4.35 to 4.25 as of October 1, 2012. Also the personal exemption is now $3950 up from $3700. ORS Connections newsletter reminds us that pension checks for December will be paid on the 18th. And lastly, your October check should reflect the $25.00 increase.
New Book Worth a Look
The Servant Economy: Where America’s Elite Is Sending the Middle Class, the latest book by Jeff Faux, EPI founding president and current distinguished fellow is getting a lot of attention. Faux looks into how big money’s influence on politics is decimating the middle class. To get more information about the book, go to www.wiley.com.
Factoid
During the 2010 tax season, Americans paid 9.9% of their income on state and local taxes. This number, according to a report released today by The Tax Foundation, is up from 9.3% in 2000, but is basically unchanged from 2009. Per capita income in the U.S. fell from $42,539 in 2009 to $41,146 in 2010, while taxes fell slightly, from $4,160 in 2009 to $4,112 in 2010.
The Tax Foundation rates Michigan as 12th in the country for business tax climate for fiscal year 2013.
Editor’s note: June Morse may be contacted at jmorse10@comcast.net or 517-886-9323.
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