Retirement Matters

January 2022

Saving Enough? — “The Real Deal for the Public Sector” is a recent report from the National Institute on Retirement Security (NIRS) and Aon. Their research finds that pension plans alone are not providing an adequate retirement income for state and local government employees. This analysis assumes the retiree receives the typical public sector retirement plan — including a defined benefit pension, Social Security, and employer provided medical care. The report focuses on having an adequate retirement income because without it, public employees will be less able to afford retiring. The report concludes that retirees need to save an additional 4 to 6 percent of their salary to ensure enough retirement income. Those without employer provided medical coverage will need to save 6 percent more of their pay during their career. This could impact employees in the Defined Contribution plan, retiring without state sponsored medical insurance.

Challenges Ahead — Workers face barriers to preparing for retirement including living longer plus escalating housing, health care, and long-term care costs. The shift from pensions to 401(k) plans increases the risk for employees, especially for female workers receiving less benefits but living longer than men, and younger workers facing higher medical costs in future years.

Strong Pensions — The good news is that public pension plans remain strong, due in part to the impact of changes from the lessons learned from the Great Recession. Most plans recovered their pre-recession asset levels within six years and continued to pay over a trillion dollars in benefits. In recent years, these public plans have gained record-high asset levels. Public pension plans have made strategic changes to their asset allocations in response to market conditions. This is true of the Michigan State Employees Retirement System (MSERS) with its strong 9.5 percent cumulative total fund return over the previous ten years. Plans have proved to be flexible in making adjustments as illustrated by the Michigan State Investment Board (MSIB) which took action to reflect the current low return environment by authorizing a revised asset allocation strategy this September.

Keeping Workers — According to Mission Square Research Institute, more than half of the state and local workers report that they would like to leave their government job to achieve better pay and benefits. Only 20 percent of state and local workers are extremely or very confident that their pension will cover all their retirement living expenses. Retirement benefits are often overlooked as a critical tool needed by government employers for recruiting and retaining their workforce. Increased savings by public employees is vital.

A Helping Hand — For the second time in three years, Congress has passed major legislation improving the rules for retirement savings. The SECURE 2.0 Act of 2022 was signed into federal law on December 29, 2022, as part of the Consolidated Appropriations Act, 2023. This is an example of the important role that government can play to promote savings. New rules will make it easier to accumulate retirement savings and less costly to withdraw them. These financial structures provide increased access to retirement plans and streamline administration and reporting requirements. Some changes impact plans in 2023 but many of the changes are not effective until 2024 and 2025. Highlights of selected provisions are listed below:

  1. Require auto enrollment in 401(k) plans. Most employers starting new workplace retirement savings plans will be required to automatically enroll employees. This encourages early savings and avoids the individual’s inertia of not joining a plan. Currently, this is elective for employers. Employees may actively opt out. Effective after December 31, 2024.
  2. Allow employer contributions for student loan payments. While paying your student loan debt, it’s harder to save for retirement. Secure 2.0 permits employers to make a matching contribution to an employee’s retirement plan based on their qualified student loan payments. Effective after December 31, 2023.
  3. Increase the age for required minimum distributions (RMDs). Starting in 2023, the age will rise for when you must start to withdraw a required minimum amount from your 401(k) or IRA every year to age 73 effective January 1, 2023 and then to age 75 a decade later in 2033. This helps retirees keep tax deferred savings as they grow within retirement plans.
  4. Build access to emergency savings. Presently, if you take from your 401(k) before age 59 1/2, you must pay taxes on that money and also pay a 10 percent early withdrawal penalty. Savers are reluctant to invest in these retirement plans due to the penalties. Secure 2.0 allows for a penalty-free withdrawal of up to $1,000 a year for emergencies. However, there will still be income tax on that withdrawal with other requirements. Effective after December 31, 2023.
  5. Raise catch-up contribution limits for older workers. Currently, if you’re 50 or older, you may contribute an additional $6,500 to your 401(k) on top of the $20,500 annual federal limit in effect this year. Under the new rules, instead of $6,500, those aged 60-63 will be allowed to contribute $10,000 or 50 percent more than the regular catch-up amount in 2025, whichever is greater. Effective after December 31, 2024.
  6. Enhance and simplify the Saver’s Credit. The federal match for lower-income earners’ retirement contributions of up to $2,000 a year has been improved. Those eligible will get a matching contribution for up to 50 percent of their savings, but the match cannot exceed $1,000. Effective after December 31, 2026.
  7. Make it easier for part-time workers to save. Some state employee retirees are working part-time to supplement their income. Part-time workers currently must be allowed to participate in a workplace retirement plan if they have three years of service and work at least 500 hours a year. The new package reduces that service time to two years. Effective after December 31, 2024.

Utility Refunds — DTE Energy Company could be providing a refund of up to $20 million to their customers as the company’s financial results for 2022 exceeded their expectations. Consumers Energy Company’s application for a one-time customer refund was approved by the Public Service Commission in December.

Editor’s note: Joanne Bump serves as feature columnist for “Retirement Matters.” Column content is time sensitive and is based on information as of 1/8/23. Joanne can be contacted by e-mail at joannebump@gmail.com.

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