BUSINESS ROUNDTABLE
ENDORSES MANDATORY SOCIAL SECURITY FOR NEW PUBLIC EMPLOYEES
On January 16, 2013,
the Business Roundtable (BRT) announced that it was recommending mandatory
Social Security coverage for all new State and local government employees as part
of any “comprehensive economic growth and deficit-reduction strategy” that
Congress and the Administration develops.
(The BRT is an association of
chief executive officers of leading U.S. companies with more than $7.3 trillion
in annual revenues and nearly 16 million employees.)
In an Op-Ed in the Wall Street Journal, Gary W.
Loveman, CEO of Caesars Entertainment Corporation and Chair of the Business
Roundtable’s Health and Retirement Committee, wrote that about one in four
State and local government workers is exempt from Social Security payroll taxes
and that Congress and the White House should eliminate this “special exemption”
for all new state and local government workers.
It is believed that this is the first time that the BRT has endorsed
such a proposal.
Based on a report prepared for the Committee to Preserve
Retirement Security (CPRS) by the Segal Company in 2011, it is estimated that the
governmental employer and employee cost of Social Security coverage for newly
hired governmental workers for the first five years of coverage would be $53.5
billion. This increased cost in payroll taxes would have an impact in every
state. (CPRS is composed of individuals and
organizations having an interest in maintaining a Social Security system which
does not impose mandatory participation on state and local governmental units
and their employees.)
The BRT’s “Social Security Reform and Medicare Modernization
Proposals” also include recommendations to gradually raise both the Social
Security retirement age and the Medicare eligibility age to 70, exempting
anyone who is currently 55 or older.
OBAMA NAMES FORMER FEDERAL
PROSECUTOR TO HEAD SEC
On Thursday, January
24, 2013, President Obama announced his intention to nominate Mary Jo White to
become Chair of the Securities and Exchange Commission (SEC). White was the U.S. attorney for the Southern
District of New York (Manhattan) from 1993 to 2002, and is now the partner in
charge of litigation at Debevoise & Plimpton in New York City. If confirmed by the Senate, which some
observers are saying could happen as early as April, White will replace Elisse Walter,
who is currently serving out the remainder of the term of Mary Schapiro, the
former SEC chair who resigned in December.
Among White’s claims to fame are her convictions of the
terrorists responsible for bombing the World Trade Center, and John Gotti, the
head of the Gambino crime family. She
would be the first prosecutor to head the SEC in its 79-year history, and her
appointment is widely believed to be a strong message that White will “give
high priority to expanding the [SEC’s} enforcement efforts,” according to an
article by the Associated Press. The
Wall Street Journal agrees, saying that her nomination “could signal
tougher policing of Wall Street.”
Others are concerned with her lack of regulatory
experience. “What we need now, it seems,
is someone who can lay down the rules, still not finalized from Dodd-Frank,
that will not just hopefully limit Wall Street malfeasance but its propensity
for stupidity as well,” argues Stephen Gandel, senior editor for Fortune,
writing for CNNMoney on January 24th. (Indeed,
according to a new Government Accountability Office (GAO) report, Federal
regulators have issued rules for less than half of the Dodd-Frank provisions
that require them.) Gandel calls White
“the right woman at the wrong time.”
Jeff Mahoney, general counsel for the Council of Institutional
Investors (CII), told Pensions and Investments that CII’s members look
forward to working with White to further corporate governance measures. “She obviously has outstanding credentials,”
Mr. Mahoney was quoted as saying.
White’s appointment could also be good news for those who
were concerned with some of the reform recommendations in the SEC’s recent
report on the municipal bond market that Chairman Walter had helped to
spearhead, which included improving disclosures in muni bond offerings, such as
those related to pensions. According
to The Bond Buyer, White, “in an attempt to make the most of the SEC’s
limited resources, may chose to focus more on addressing issues in the
corporate market, and less on muni market issues.”
CONGRESSMAN NUNES TO
CHAIR TRADE SUBCOMMITTEE: GOOD NEWS OR
BAD NEWS?
Congressman Devin
Nunes (R-CA), the chief sponsor of the Public Employee Pension Transparency Act
(PEPTA) in the last Congress, has been named as the chairman of the House Ways
and Means Committee’s Subcommittee on Trade.
This is Nunes’ first leadership position on the powerful House
tax-writing committee, and it is unclear if this will affect his interest in
public pensions.
Congressman Nunes, who was previously an unknown when it
came to public pension reform, first introduced his PEPTA legislation during
the lame duck session of the 111th Congress in 2010, and then re-introduced
it in the last Congress (the 112th) on February 9, 2011. He pursued an aggressive media campaign in
connection with the legislation that year, famously telling Fox News that he
was “trying to smoke the rats out of their holes” with his bill. It was also showcased in five separate
hearings in the House of Representatives in 2011.
Since then, Nunes has had relatively little to say directly
with reference to his legislation, which has nevertheless become a focal point
for many opponents of public sector defined benefit plans. Now, as chairman of the Trade Subcommittee,
he will have jurisdiction over tariffs, import and export policies, customs,
international trade rules, and commodity agreements. Nunes himself has said that his focus for the
next two years will be on creating a free trade agreement between the U.S. and
the European Union and expanding the Trans-Pacific Partnership, a pact formed
in 2011 to boost trade and investment between Australia, Brunei Darussalam,
Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam and the U.S. No small tasks.
Will Congressman Nunes still have the time, or the interest,
for pensions? Once the 112th Congress
ended, his PEPTA legislation also expired, and will have to be reintroduced in
the 113th Congress. Will Mr.
Nunes continue his leadership role with the issue, or will it be picked up by
others. As of the date of this writing,
Congressman Nunes has NOT reintroduced his PEPTA legislation in the new
Congress.
On the other hand, as a member of the Ways and Means
Committee leadership, Nunes will have an increased ability to move his
legislation if he so desires, even if it has not been formally re-introduced. For example, in 2012, the substance of the PEPTA
bill was briefly – and eventually, unsuccessfully -- in play as a potential
addition to a must-do piece of legislation dealing with student loans and
highway funding, suggesting how the legislation may ultimately move – not as a
free-standing bill but as part of a larger package of urgent legislation.
Finally, while the flames may have died down since 2011, those behind the
scenes stoking the fires of Federal intervention in the public pension arena are
still very much active and alert to any possibilities to advance their cause.
It is hard to believe
that, given the investment of time and effort that opponents of public pensions
have put into advancing PEPTA, it will not reappear in the 113th Congress
in some form, even if not reintroduced by Congressman Nunes.
JOSHUA RAUH CONTINUES
CAMPAIGN OF MISINFORMATION CONCERNING PUBLIC PENSIIONS
Joshua Rauh, now a
professor of finance at Stanford University’s Graduate School of Business, is
still active in spreading inflammatory accusations and misinformation
concerning public pensions. However, he is not going unchallenged. Recently, NASRA’s research director, Keith
Brainard, publically called Rauh out, asking why he and other academics are not
held accountable for false statements and their consequences like public
officials would be.
A new video prepared by the Stanford University Graduate
School of Business published on January 25th on YouTube features
Professor Rauh discussing the “Looming Pension Crisis.” For example, Rauh
warns that there is going to be “a great deal of competition between municipal
bond holders and the recipients of the [governmental] pensions as to who is
going to get paid first.” Also, did you know that 10% of the population
(public employees) is owed $4.5 trillion by the other 90%? (Rauh
continues to make these claims concerning taxpayer liabilities associated with
unfunded pensions despite the NCTR/NASRA brief debunking his research in this
regard.)
In the new video, Rauh provides his explanation for what is
wrong with the way that state and local governments budget for employee
pensions; what happens if public sector pension funds do not achieve targeted
returns; how would a public sector pension crisis impact financial markets; and
why should the business community be concerned about a pension crisis.
And he does it all in less than 5 minutes!
Playing soon at a theater near you – or on a state
legislator’s iPad?
However, Professor Rauh is no longer getting away with
making false statements unchallenged. In
an article in the January 21, 2013, issue of Pensions and Investments,
NASRA’s Keith Brainard calls out Professors Rauh and his colleague, Professor Robert
Novy-Marx, for their long-running campaign of misinformation. A function of negligence or fraud, Brainard
asks.
As well credentialed academics on the staff of highly
respected institutions of higher education, they should know better, Brainard
asserts. “Given their backgrounds and
positions,” he observes, “one would assume they are capable of basic research
and are making their claims based on solid information.” However, apparently the two are not, if an
op-ed piece in the December 10, 2012, Providence Journal, is any
example, Keith explains.
In that piece, Rauh and Novy-Marx state that Rhode Island’s anticipated
annual return of 8.25% in pension investment has for the past decade come in at
about one-third that rate, only 2.4%. That is simply false, Brainard points
out. In fact, information made public by
the Rhode Island retirement office regarding its investment return for the past
decade, prepared by an independent consultant, shows the Rhode Island pension
fund's annualized return for the 10-year period ended last Sept. 30 was 8.3%,
not 2.4%. In addition, Brainard notes, since
2010 the Rhode Island retirement plans have used an anticipated annual return
of 7.5%, not the 8.25% rate claimed by the professors.
In the past, Rauh’s “misinformation” has also been called
into question by none other than the U.S. Government Accountability Office (GAO),
which observed, in connection with Rauh’s study purporting to identify the
dates when specific public plans were expected to exhaust their assets, that
these projected exhaustion dates were “not realistic estimates of when the
funds might actually run out of money.”
Pointing out that if a public or corporate official
distributes false financial information that serves as the basis for
unwarranted action by others, they are guilty of either fraud or negligence
depending on whether it was signed off on knowingly or carelessly, Brainard
asks: “Why then are academics not held
to the same level of accountability?”
Why, indeed.
NEW NIRS PRIMER ON
PUBLIC PENSIONS’ INVESTMENT PROCESS
The National Institute
on Retirement Security (NIRS) has just released a new issue brief providing a
comprehensive overview of the public pension investment process. Given the increased attention to public
pension investments by the media and critics of governmental plans following
the market turndowns of the last decade, this NIRS primer should prove very helpful
in educating policymakers and the public, providing the basics as to how public
pensions allocate assets and set expected rates of return.
The new publication, “How Do Public Pensions Invest? A Primer,” is co-authored by Ronnie Jung, CPA,
the former executive director of the Teacher Retirement System of Texas and a
past president of NCTR; and Nari Rhee, PhD, NIRS manager of research. It
focusses on several aspects of the investment process, including:
- Distribution of investments across stocks,
bonds, and other asset classes in order to maximize returns and minimize risk;
- Principles that guide how public pension funds
invest and the institutionalized practices through which plan trustees set
investment policies;
- Evaluation and management of investment related
risk; and
- Investment return assumptions among public
pension funds in comparison to historical performance and the future outlook.
NIRS also conducted a webinar on its new release, and
produced a PowerPoint presentation with helpful charts and tables explaining
the overall investment process.
TEACHER PENSIONS ARE
NOT HUGE DRAIN ON EDUCATION SPENDING, RESEARCH SHOWS
A review of
contributions data for the nation’s largest teacher pension systems collected
by the Public Fund Survey, which is a joint project of NCTR and NASRA, was
recently compared to education spending data published by the U.S. Census Bureau. The results show that, on average, teacher
pensions account for only 3.96% of all state and local spending on
education.
This may come as a surprise to the National Council on
Teacher Quality (NCTQ) and others who claim that the structure of teacher pension
systems is untenable and who have argued for years that the quality of
education suffers as already strapped school systems are required to commit
increasing shares of their current funds to pay for retired teachers’ benefits.
Pension Dialog recently distributed a table based on
research conducted by Alex Brown, research manager at NASRA, which shows the
rates calculated for statewide retirement systems whose only members are
teachers and/or education workers for FY 2010.
Note that the States whose teachers do not participate in
Social Security are italicized in the table.
According to Alex, this factor helps to explain why these states may
have higher percentages of spending associated with pensions than other states
in the table.
ANNUITIZATION IN THE
SPOTLIGHT AT EBRI, GAO
The Employee Benefits
Research Institute (EBRI) as well as the Government Accountability Office (GAO)
have both issued recent reports concerning differing aspects of annuitization. EBRI looks at how plan design – namely the
ability to make a lump sum withdrawal --directly affects the chances that a
retiree will choose to annuitize his or her retirement savings, while GAO
examines new forms of annuitization that offer guaranteed lifetime withdrawal
benefits, and discusses their potential appeal as well as their downsides.
EBRI reports that annuitization decisions are directly
linked to plan design. If a lump sum
distribution is not offered in a DB plan, then annuitization rates are very
high. If lump sums or partial lump sums
are available, annuitization rates drop dramatically. In short, EBRI says that the rate of
annuitization “varies directly with the degree to which plan rules restrict the
ability to choose a partial or lump-sum distribution.”
Therefore, in the context of overall retirement security for
all Americans, the challenge in providing retirees with a benefit that they
cannot outlive may have less to do with a lack of knowledge about annuities and
how they work, or their costs, or a desire to have access to assets in cases of
emergencies, and more to do with simply having the chance to cash out their
retirement savings. The study focuses on
DB plans and cash balance plans, but perhaps the real lesson here is for DC
plans?
The new EBRI issue brief also looks at annuitization
decisions of both older workers and younger workers; annuitization trends by
account balance; and annuitization trends by tenure.
The GAO has also issued a report recently concerning
annuities. Its focus is on two specific
products: variable annuities with guaranteed lifetime withdrawal benefits
(VA/GLWB), and contingent deferred annuities (CDA), which are relatively
new. A recent five-minute GAO “podcast”
is now also available that covers the report’s highlights.
Unlike more traditional annuities, the assets of purchasers
of VA/GLWBs and CDAs are not annuitized.
Consumers can withdraw any or all of their funds at any time. Also, under a CDA, the guarantee of lifetime
withdrawals can, in certain cases, be applied to existing investment
assets. That is, instead of having to
first sell the assets and then use the proceeds to purchase the annuity, as is
typically the case, existing investment assets may be able to be used to purchase
a CDA to cover them.
The GAO report explains how the two products function,
including how investment gains and losses are treated, how withdrawal amounts
are determined, and what happens when a consumer’s investment account is
depleted. The report also discusses some
of the risks that can be associated with these products.
As the Congress and other policymakers examine the future of
retirement security, could these products have an increasingly important role
to play?
BLS EXAMINES “THE LAST
PRIVATE INDUSTRY PENSION PLANS”
The Bureau of Labor
Statistics (BLS) has produced what it refers to as a “visual essay” consisting
of a number of charts and graphs documenting the decline of the traditional
defined benefit pension in the private sector and focusing on what remains. BLS examines current plan features, changes
to the data over time, and additional details about defined benefit plans,
documenting, for example, which private sector industries and areas of the country
still utilize the DB model.
As the BLS notes, defined benefit plans are becoming rare
for workers in private industry, with only 10 percent of all private sector establishments
providing defined benefit plans in 2011, covering 18 percent of private
industry employees.
In addition to the decline in coverage, BLS identifies recent
trends among private sector DB plans reflecting employer decisions to convert
to cash balance plans or limit future accruals.
The Bureau of Labor Statistics of the U.S. Department of
Labor is an independent statistical agency responsible for measuring labor
market activity, working conditions, and price changes in the economy. Its
mission is to collect, analyze, and disseminate essential economic information
to support public and private decision-making.
CONGRESSIONAL DB
PENSION CONVERSION PROPOSED
A bipartisan group of
House members has proposed legislation to freeze the current Congressional
pension plan, preventing current members from accruing any more benefits, and
shutting down the system completely for new members of Congress.
On January 4th, Congressman Tim Griffin (R-AZ) introduced
the “End Pensions in Congress” Act (EPIC Act), that would terminate further
retirement benefits for Members of Congress, except the right to continue
participating in the Thrift Savings Plan (TSP). The TSP is the defined contribution plan for
Federal employees. The bill has seven
cosponsors: Ron DeSantis (R-FL); Trey Gowdy
(R-SC); Mick Mulvaney (R-SC); Steven Palazzo (R-MS); Trey Radel (R-FL); Reid Ribble
(R-WI); and Kevin Yoder (R-KS).
On January 25th, Congressman Mike Coffman (R-CO)
introduced HR 423, similar legislation.
His version has five cosponsors:
David Cicilline (D-RI); John Fleming (R-LA); Virginia Foxx (R-NC); Jared
Polis (D-CO); and David Schweikert (R-AZ).
Griffin has said in the past, when introducing similar
legislation in the 112th Congress, that eliminating pensions for
those who will be elected in the future “will show we are serious about
addressing Washington’s unsustainable spending.”
According to a press statement issued this year, Congressman
Coffman believes that “Congress needs to set an example for the country and I
believe that ending our pension plan would be a good start.” Huh? “It makes no sense for congress to continue
to reward itself, using taxpayer dollars, with a defined benefit plan,” Coffman
said, “when much of the country has moved to a defined contribution plan like a
401K.” Coffman said that “We need to end
this perk.”
Both bills have been referred to the Committee on House
Administration, and in addition to the Committee on Oversight and Government
Reform. Their legislation introduced in
the 112th Congress was similarly referred, but did not receive
action before that Congress adjourned.
And you thought that you were the only ones to have to deal
with DB/DC conversion efforts.
