STUMP » Articles » Things Fall Apart: Pension-o-sphere update - Kentucky, MEPs, and more » 19 December 2018, 10:09

Where Stu & MP spout off about everything.

Things Fall Apart: Pension-o-sphere update - Kentucky, MEPs, and more  

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19 December 2018, 10:09

So. Stuff happened to me last week. I tried something video-wise, but not really happy with the result. Stu has been valiantly trying to put my Macbook back in running order, but I think it may be truly dead this time (pretty sure I got it new back in 2011, so 7 years, while not great, is about as long as I could expect).

I want to give an update on various pension-related stories that are current. I will just be linking to the news stories, providing minimal commentary, etc. We can come back to commentary another time.

KENTUCKY: REFORM DENIED, LEGISLATURE IN SESSION

I’m not surprised by this one, and the basis for shutting down the reform was a gimmee: the proper process wasn’t followed.

Note that the court did not (and did not have to) rule based on whether the specifics of the reform bill were unconstitutional (and I believe they will be found so, if they manage to follow proper process in the Kentucky legislature right now). They didn’t follow proper process, so the bill is null and void.

Stories on KY pension bill being shot down:

That said, the Kentucky legislature was back in session, trying to get the process right this time (so the state court can then shoot it down for having unconstitutional pension cuts, at which point they need to amend their state constitution,) but it looks like that’s gone nowhere.

Stories on KY legislature back in session for the pension bill (and then adjourning):

So, I guess, we’ve got to wait til 2019 to see if they do something.

CHICAGO: RAHM WANTS A PENSION OBLIGATION BOND

Of course he does. After all, he wants to be paid his pension, and he won’t be around for the aftermath of anything dodgy relating to how the pension assets do once he leaves office.

Stories on potential POBs for Chicago:

I wonder if Rahm will stick around Chicago, or go reside in DC again, once his mayor-ship is over.

ILLINOIS: RAHM SAYS ILLINOIS CONSTITUTION SHOULD BE CHANGED

This comes from a couple things. The main news hook is that a relatively minor change (to undo an obvious abuse of Illinois pension benefits) was ruled unconstitutional… and this was not going to change the liabilities very much, but nope, the state court said unconstitutional.

The second thing is that Rahm is not running for re-election next year. It’s so easy when you’re not running for office ever again to make all sorts of political pronouncements. It’s highly unlikely Rahm will ever run for office again, much less win, so he’s been enjoying himself saying the obvious that no Illinois Democratic politician will ever say.

There is no way any meaningful Illinois pension reform can happen without the state constitution getting changed. This is an older blog post where I talk about the constitution there.

Stories on the unconstitutionality of a relatively minor change, and Rahm’s comments:

I haven’t heard much from Mike Madigan and others on this idea. I assume this will go nowhere, until Illinois really can’t issue more bonds.

Then they’ll know it’s serious.

MULTIEMPLOYER PENSION BAILOUT: LOOKING FOR SOMETHING

I said my bit about the congressional committee looking for a bailout that can get passed … and it dying with a whimper, but the members of Central States are in a politically crucial area, and the money is leaving fairly fast. They need some sort of bailout before the cash totally runs out, at which point, the retirees are going to get huge benefit cuts. In addition, even with the minimal payments Central States members will get, the PBGC, which provides the minimal payments, will be greatly strained by this pension fund running out of assets.

So various groups are casting about for something – anything – that can at least bail out Central States.

Stories on looking for a bailout, still:

There is some jawboning over budget stuff, which is sucking out all the air from Congress, so I don’t expect anything to happen this year. The amount needed to patch this problem is so huge, I think they’ll punt til the House, at least, is Democratic (they’ll pass something). There are plenty of Republican senators who will want to play ball on this.

Related: Elizabeth Bauer has been doing a series on ailing MEPs at Forbes — I highly recommend. She really digs into the details, with more than just Central States, too.

401KS TURN 40

I didn’t realize I was older than 401(k)s.

After 40 years, some say 401(k) is due for a facelift

Forty years ago, Congress paved the way for the birth of the nation’s first 401(k) retirement savings plan when legislators added paragraph (k) to Section 401 of the Internal Revenue Code.

Since that day on Nov. 6, 1978, the 401(k) has grown and flourished, settling comfortably into households across America. Yet while many say it has aged well, plenty more say that it’s time for a few nips and tucks.

“It’s helped tens of millions of workers save somewhere between $10 trillion to $15 trillion when you count the money that’s been transferred out of 401(k)s into IRAs,” acknowledged Ted Benna, a benefits consultant who has been called the father of the 401(k).

Big numbers, indeed. The plans took off almost immediately after The Johnson Cos., the benefits firm co-owned by Mr. Benna, launched its plan in 1981.
…..
Much better off
Fans of 401(k)s say that workers are much better off today than they were with traditional pension plans. Only about 10% of workers in a traditional defined benefit plan actually received a full benefit at retirement age from the plan due to job changes or leaving the workforce, said Olivia Mitchell, a professor of business economics and public policy and executive director of the Pension Research Council at the Wharton School of the University of Pennsylvania in Philadelphia.

Defined contribution plans, in contrast, are portable, meaning whatever money is in the account belongs to the participant regardless of job changes.
…..
Paltry amounts for many

Whether due to poor investment choices or lack of participation, the amounts many individuals have in 401(k) accounts are paltry. In 2016, the typical working household headed by someone between 55 to 64 had a median of $135,000 in 401(k) and IRA balances, according to the Center of Retirement Research at Boston College. Those headed by individuals 45 to 54 had $97,000, while those headed by people 35 to 44 had only $40,000.
….
“I think the 401(k) works well for higher-income people who start saving early, but for half of the population it really is an inadequate mechanism,” said Alicia Munnell, director for the Center for Retirement Research.

Still, she and most experts agree there’s no going back to the days of traditional pensions.

“People wax nostalgically about the defined benefit plan, but I don’t think the defined benefit plan was going to be sustainable as the nature of the workforce changed,” Ms. Munnell said, referring to the increase in worker mobility.

Plus, many are quick to note, a lot of pension funds face severe funding issues.

“The funding shortfalls that are plaguing many corporate plans and many state and local plans are not seen in the defined contribution environment,” Ms. Mitchell said.

It’s a lot more difficult (and obviously illegal) to raid pension funds when there is a specific dollar amount tied to a specific person… something to think about as huge pots of money in DB plans run out, and then the specific individuals have little to count on.

Ms. Mitchell proposes that employers include a default deferred annuity into the 401(k) at retirement. As she envisions it, employees would have 10% of their 401(k) balances automatically placed in a deferred annuity, which they would receive at 80 to 85. It would apply to 401(k) account balances of $65,000 or more.

In the end, 401(k)s may come full circle as they start looking more and more like traditional pensions, according to experts.

It’s about putting the “pension back” into 401(k) plans, Ms. Mitchell said.

I happen to have a lot of money saved with TIAA from my 5 years of employment there, a decade+ ago, and it’s in retirement annuities. I have rolled in a prior 401(k) into that account (yay!) and I can get lifetime income from those annuities.

Speaking of which, there is a good annuity explainer in the NY Times from Friday:

The Simplest Annuity Explainer We Could Write
We define immediate annuities, fixed annuities, variable annuities and index annuities, plus give you questions to ask salespeople.

….
Insurance, Not Investments
The insurance companies that create annuities often make them seem like investments. But really they’re more like insurance.

At their simplest, annuities offer a guarantee. If you turn over some money, you’ll be guaranteed to get all that money back — plus usually a certain amount more. Or you turn over some money and you’ll be guaranteed a regular check for a certain period.

Like insurance to stave off financial disaster, an annuity is something you purchase to guarantee that you won’t run out of money if you live a long time. Such financial guarantees are attractive. After all, we don’t know how our investments will perform: This year may be the first in a while that your stock and bond index funds both lose money.

….

Paycheck Annuities
Paycheck annuities are the simplest annuities, and they are kind of like a pension. You hand over a pile of money, and in exchange you can receive a regular check for life.

An immediate income annuity generally starts sending checks very soon, and they keep coming until you die. What you get each month will depend in large part on how much money you hand over, your age, your sex, whether you’re including a spouse in the package (so the checks keep coming until the second person dies) and the prevailing interest rates at the time you buy the annuity.

Deferred income annuities, also known as longevity insurance, work similarly, but the checks don’t start coming right away. The longer you wait to receive payments — you buy at 65 but don’t start collecting checks until 85, for example — the bigger the checks will be.

There is risk involved with a deferred income annuity. Each year that you wait in between the purchase and the first check brings you closer to death, and the annuity company is betting on your eventual demise. The fun — broadly speaking — in annuities is beating the odds and collecting checks until you’re 105.

The author doesn’t mention, but most of these annuities come with a certain period option — I wrote an article over 10 years ago about what happens when you get a life annuity + certain period (for different combos of age and period) – while, from an investment point of view, the result wasn’t spectacular, from a “guaranteeing your money is protected”, it was very good.

All the combos I calculated provided at least a 0% guaranteed return on the money… and you wouldn’t outlive the cash flow. Something to consider in retirement.

I’ll close with a quote from Jane Austen, from the beginning of Sense and Sensibility, and is probably funny only to actuaries:

“That is very true, and, therefore, I do not know whether, upon the whole, it would not be more advisable to do something for their mother while she lives, rather than for them—something of the annuity kind I mean.—My sisters would feel the good effects of it as well as herself. A hundred a year would make them all perfectly comfortable.”

His wife hesitated a little, however, in giving her consent to this plan.

“To be sure,” said she, “it is better than parting with fifteen hundred pounds at once. But, then, if Mrs. Dashwood should live fifteen years we shall be completely taken in.”

“Fifteen years! my dear Fanny; her life cannot be worth half that purchase.”

“Certainly not; but if you observe, people always live for ever when there is an annuity to be paid them; and she is very stout and healthy, and hardly forty. An annuity is a very serious business; it comes over and over every year, and there is no getting rid of it. You are not aware of what you are doing. I have known a great deal of the trouble of annuities; for my mother was clogged with the payment of three to old superannuated servants by my father’s will, and it is amazing how disagreeable she found it. Twice every year these annuities were to be paid; and then there was the trouble of getting it to them; and then one of them was said to have died, and afterwards it turned out to be no such thing. My mother was quite sick of it. Her income was not her own, she said, with such perpetual claims on it; and it was the more unkind in my father, because, otherwise, the money would have been entirely at my mother’s disposal, without any restriction whatever. It has given me such an abhorrence of annuities, that I am sure I would not pin myself down to the payment of one for all the world.”

Dan Skwire wrote a bit on actuarial issues in Jane Austen. The article, alas, is not free, but you can read the abstract here.

And that’s all I have for today. Yes, I’ve seen the ideas about trying to use legal marijuana to fund pensions… but that deserves its own post later.


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